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PROF.GARGI NAIDU SOMESH BEHERE MASTER OF BUSINESS ADMINISTRATION (MBA) VIDYASAGAR INSTITUTE OF MANAGEMENT HDFC Asset Management Company Ltd. FOR Somesh Behere A Report on Project work By BARKATULLAH UNIVERSITY BHOPAL(M.P.) In SESSION(2008-2010) BY:
"RISK RETURN ANALYSIS AND COMPARATIVE STUDY OF MUTUAL FUNDS" FOR HDFC Asset Management Company Ltd. A Report on Project work In MASTER OF BUSINESS ADMINISTRATION (MBA) By Somesh Behere GUIDED BY: SUBMITTED BY: PROF.GARGI NAIDU SOMESH BEHERE HOD ACADEMICS MBA IV Semester VIM BHOPAL BHOPAL VIDYASAGAR INSTITUTE OF MANAGEMENT BARKATULLAH UNIVERSITY BHOPAL(M.P.) SESSION (2008-2010) BONOFIDE CERTIFICATE This is to certify that the Report on Project Work titled "RISK RETURN ANALYSIS AND COMPARATIVE STUDY OF MUTUAL FUNDS" for HDFC Asset Management Company Ltd. is a bonafide record of the work done by Somesh Behere studying in Master of Business Administration in Vidhyasagar Institute of Management ,Bhopal during the year 2008-10. Project Viva-Voce held on..................... Internal examiner External examiner EXECUTIVE SUMMARY The performance evaluation of mutual fund is a vital matter of concern to the fund managers, investors, and researchers alike. The core competence of the company is to meet objectives and the needs of the investors and to provide optimum return for their risk. This study tries to find out the risk and return allied with the mutual funds. This project paper is segmented into three sections to explore the link between conventional subjective and statistical approach of Mutual Fund analysis. To start with, the first section deals with the introductory part of the paper by giving an overview of the Mutual fund industry and company profile. This section also talks about the theory of portfolio analysis and the different measures of risk and return used for the comparison. The second section details on the need, objective, and the limitations of the study. It also discusses about the sources and the period for the data collection. It also deals with the data interpretation and analysis part wherein all the key measures related to risk and return are done with the interpretation of the results. In the third section, an attempt is made to analyse and compare the performance of the equity mutual fund. For this purpose β-value, standard deviation, and risk adjusted performance measures such as Sharpe ratio, Treynor measure, Jenson Alpha, and Fema measure have been used. The portfolio analysis of the selected fund has been done by the measure return for the holding period. At the end, it illustrates the suggestions and findings based on the analysis done in the previous sections and finally it deals with conclusion part. ACKNOWLEDGEMENT I take this opportunity to express my deep sense of gratitude to all those who have contributed significantly by sharing their knowledge and experience in the completion of this project work. I am greatly obliged to, for providing me with the right kind of opportunity and facilities to complete this venture. My first word of gratitude is due to Mr.Sidhartha Chattergee – Branch Manager, HDFC AMC,Allhabad, my corporate guide, for his kind help and support and his valuable guidance throughout my project. I am thankful to him for providing me with necessary insights and helping me out at every single step. I am also thankful to Prof Ashok Diwedi Executive Trainee, the former student of VIDHYASAGAR INSTITUTE OF MANAGEMENT, Bhopal for her constant valuable assistance and consultancy. I also thank Mr.Ankit Kumr, Unit Manager for his kind words of encouragement. Above all, I express my words of gratitude to HDFC AMC, Allahabad Branch for proving me with all the knowledge resources and enabling me to pass AMFI-MTUTUAL FUND (ADVISOR) MODULE; NSE's CERTIFICATION IN FINANCIAL MARKETS (NCFM) with 74.5 percentages. I am extremely thankful to Miss. Gargi Naidu – my internal faculty guide under whose able guidance this project work was carried out. I thank her for her continuous support and mentoring during the tenure of the project. Finally, I would also like to thank all my dear friends for their cooperation, advice and encouragement during the long and arduous task of carrying out the project and preparing this report. PREFACE This is the age of technical up gradation. Nothing remains same for a long period every thing change with a certain span of time. So it is must for every organization to put a birds eye view on it's over all functioning. This report was preparing during practical training of Master of business administration (M.B.A.) from Vidyasagar institute of management Bhopal (M.P.) .The student of M.B.A.essentially required a practical training of 4to6 weeks in any organization. It gives an opportunity to the student to test their acquired knowledge through practical experiences. The objective of my study was Risk Return Analysis And Comparative Study Of Mutual Funds "HDFC Asset Management Company Ltd." I however present this report In all my modesty to the readers with a faith that it shall serve the causes of subject. . PLACE-……….. DATE………….. SOMESH BEHERE TABLE OF CONTENTS Page No. Part-I 1-37 Executive Summary Iii A. Mutual Fund Overview 1-19 1.1 Mutual Fund an Investment Platform 1-2 1.2 Advantages of Mutual Fund 3 1.3 Disadvantage of Investing Through Mutual Funds 4 1.4 Categories of Mutual Fund 4-8 1.5 Investment Strategies 8 1.6 Organisation of Mutual Fund 9-11 1.7 Distribution Channels 12 1.8 HDFC AMC Company Overview 12-19 B. Measuring and Evaluating Mutual Funds Performance 20-37 1.2.1 Purpose of Measuring and Evaluating 20-21 1.2.2 Financial Planning for Investors referring to Mutual Funds 22 1.2.3 Why Has It Become One Of The Largest Financial Instruments? 22-25 1.2.4 Evaluating Portfolio Performance 26 1.2.5 How to Reduce Risk While Investing 26-28 1.2.6 A Study of Portfolio Analysis from The Point Of Fund Manager 28-29 1.2.7 Measures of Risk and Return 29-37 Part-II 38-40 Research Methodology 2.1 Need For the Study 38-39 2.2 Objective of the Study 39 2.3 Limitations of the Study 40 2.4 Data Collection 40 Part-III 41-102 Case Analysis 3.1 Data Interpretation 41-87 3.2 Analysis of the observation 87-97 3.3 Findings 98 3.4 Recommendations 99-100 3.5 Conclusion 101 References 102 PART-I 1. MUTUAL FUND OVERVIEW 1.1 MUTUAL FUND AN INVESTMENT PLATFORM Mutual fund is an investment company that pools money from small investors and invests in a variety of securities, such as stocks, bonds and money market instruments. Most open-end Mutual funds stand ready to buy back (redeem) its shares at their current net asset value, which depends on the total market value of the fund's investment portfolio at the time of redemption. Most open-end Mutual funds continuously offer new shares to investors. It is also known as an open-end investment company, to differentiate it from a closed-end investment company. Mutual funds invest pooled cash of many investors to meet the fund's stated investment objective. Mutual funds stand ready to sell and redeem their shares at any time at the fund's PROFIT/LOSS FORM PORTFOLIO OF INVESTMENT INVEST IN VARIETY OF STOCKS/BONDS PROFIT/LOSS FROM INDIVIDUAL MARKET (FLUCTUATIONS) INVESTOR INVEST THEIR MONEY MUTUAL FUND SHEMES current net asset value: total fund assets divided by shares outstanding. Figure: 1.1 In Simple Words, Mutual fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document. Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because not all stocks may move in the same direction in the same proportion at the same time. Mutual fund issues units t o the investors in accordance with quantum of money invested by them. Investors of Mutual fund are known as unit holders. The profits or losses are shared by the investors in proportion to their investments. The Mutual funds normally come out with a number of schemes with different investment objectives which are launched from time to time. In India, A Mutual fund is required to be registered with Securities and Exchange Boa rd of India (SEBI) which regulates securities markets before it can collect funds from the public. In Short , a Mutual fund is a common pool of money in to which investors with common investment objective place their contributions that are to be invested in accordance with the state d investment objective of the scheme. The investment manager would invest the money collected from the investor in to assets that are defined/ permitted by the stated objective of the scheme. For example, a n equity fund would invest equity and equity related instruments and a debt fund would invest in bonds, debentures, gilts etc. Mutual fund is a suitable investment for the common ma n a s it offers an Oporto unity to invest in a diversified, professionally managed basket of securities at a relatively low cost. 1.2 ADVANTAGES OF MUTUAL FUND Table:1.1 S. No. Advant age Particulars 1. Portfoli o Diversif ication Mutual Funds invest in a well-diversified portfolio of securities which enables investor to hold a diversified investment portfolio (whether the amount of investment is big or small). 2. Professi onal Manage ment Fund manager undergoes through various research works and has better investment management skills which ensure higher returns to the investor than what he can manage on his own. 3. Less Risk Investors acquire a diversified portfolio of securities even with a small investment in a Mutual Fund. The risk in a diversified portfolio is lesser than investing in merely 2 or 3 securities. 4. Low Transac tion Costs Due to the economies of scale (benefits of larger volumes), mutual funds pay lesser transaction costs. These benefits are passed on to the investors. 5. Liquidit y An investor may not be able to sell some of the shares held by him very easily and quickly, whereas units of a mutual fund are far more liquid. 6. Choice of Scheme s Mutual funds provide investors with various schemes with different investment objectives. Investors have the option of investing in a scheme having a correlation between its investment objectives and their own financial goals. These schemes further have different plans/options 7. Transp arency Funds provide investors with updated information pertaining to the markets and the schemes. All material facts are disclosed to investors as required by the regulator. Flexibili ty Investors also benefit from the convenience and flexibility offered by Mutual Funds. Investors can switch their holdings from a debt scheme to an equity scheme and vice-versa. Option of systematic (at regular intervals) investment and withdrawal is also offered to the investors in most open-end schemes. Safety Mutual Fund industry is part of a well-regulated investment environment where the interests of the investors are protected by the regulator. All funds are registered with SEBI and complete transparency is forced. 8. 9. 1.3 DISADVANTAGE OF INVESTING THROUGH MUTUAL FUNDS Table:1.2 S. No. Disadva ntage Particulars 1. Costs Control Not in the Hands of an Investor Investor has to pay investment management fees and fund distribution costs as a percentage of the value of his investments (as long as he holds the units), irrespective of the performance of the fund. 2. No Custom ized Portfoli os The portfolio of securities in which a fund invests is a decision taken by the fund manager. Investors have no right to interfere in the decision making process of a fund manager, which some investors find as a constraint in achieving their financial objectives. 3. Difficult y in Selectin g a Suitable Fund Scheme Many investors find it difficult to select one option from the plethora of funds/schemes/plans available. For this, they may have to take advice from financial planners in order to invest in the right fund to achieve their objectives. 1.4 CATEGORIES OF MUTUAL FUND BASED ON THEIR STURCTURE OPEN ENDED FUNDS CLOSE-ENDED FUNDS Figure:1.2 2. BASED ON INVESTMENT OBJECTIVE EQUITY FUNDS BALANCED FUNDS DEBT FUNDS INDEX FUNDS LEQUID FUNDS DEBT ORIENTED GUILT FUNDS DEVIDEND YEILD EQUITY ORIENTED EQUITY DIVERSIFIED INCOME FUNDS THEMANTIC FUND FMPS FUNDS SECTOR FUND FLOATING RATE ELSS ARBITAGE FUNDS Mutual funds can be classified as follow: Based on their structure: Open-ended funds: Investors can buy and sell the units from the fund, at any point of time. Close-ended funds: These funds raise money from investors only once. Therefore, after the offer period, fresh investments cannot be made into the fund. If the fund is listed on a stocks exchange, the units can be traded like stocks (E.g., Morgan Stanley Growth Fund). Recently, most of the New Fund Offers of close-ended funds provided liquidity window on a periodic basis such as monthly or weekly. Redemption of units can be made during specified intervals. Therefore, such funds have relatively low liquidity. Based on their investment objective: Equity funds: These funds invest in equities and equity related instruments. With fluctuating share prices, such funds show volatile performance, even losses. However, short term fluctuations in the market, generally smoothens out in the long term, thereby offering higher returns at relatively lower volatility. At the same time, such funds can yield great capital appreciation as, historically, equities have outperformed all asset classes in the long term. Hence, investment in equity funds should be considered for a period of at least 3-5 years. It can be further classified as: 1. Index funds- In this case a key stock market index, like BSE Sensex or Nifty is tracked. Their portfolio mirrors the benchmark index in terms of both composition and individual stock weightages. 2. Equity diversified funds- 100% of the capital is invested in equities spreading across different sectors and stocks. 3. Dividend yield funds- it is similar to the equity-diversified funds except that they invest in companies offering high dividend yields. 4. Thematic funds- Invest 100% of the assets in sectors which are related through some theme. e.g. -An infrastructure fund invests in power, construction, cements sectors etc. 5. Sector funds- Invest 100% of the capital in a specific sector. e.g. - A banking sector fund will invest in banking stocks. 6. ELSS- Equity Linked Saving Scheme provides tax benefit to the investors. ďƒ˜ Balanced fund: Their investment portfolio includes both debt and equity. As a result, on the risk-return ladder, they fall between equity and debt funds. Balanced funds are the ideal mutual funds vehicle for investors who prefer spreading their risk across various instruments. Following are balanced funds classes: 2 Debt-oriented funds -Investment below 65% in equities. 3 Equity-oriented funds -Invest at least 65% in equities, remaining in debt. ďƒ˜ Debt fund: They invest only in debt instruments, and are a good option for investors averse to idea of taking risk associated with equities. Therefore, they invest exclusively in fixed-income instruments like bonds, debentures, Government of India securities; and money market instruments such as certificates of deposit (CD), commercial paper (CP) and call money. Put your money into any of these debt funds depending on your investment horizon and needs. 1. Liquid funds- These funds invest 100% in money market instruments, a large portion being invested in call money market. 2. Gilt funds ST- They invest 100% of their portfolio in government securities of and Tbills. 3. Floating rate funds - Invest in short-term debt papers. Floaters invest in debt instruments, which have variable coupon rate. 4. Arbitrage fund- They generate income through arbitrage opportunities due to misspricing between cash market and derivatives market. Funds are allocated to equities, derivatives and money markets. Higher proportion (around 75%) is put in money markets, in the absence of arbitrage opportunities. 5. Gilt funds LT- They invest 100% of their portfolio in long-term government securities. 6. Income funds LT- Typically, such funds invest a major portion of the portfolio in long-term debt papers. 7. MIPs- Monthly Income Plans have an exposure of 70%-90% to debt and an exposure of 10%-30% to equities. 8. FMPs- fixed monthly plans invest in debt papers whose maturity is in line with that of the fund. How are funds different in terms of their risk profile: Table:1.3 Equity Funds High level of return, but has a high level of risk too Debt funds Returns comparatively less risky than equity funds Liquid and Market funds Money Provide stable but low level of return 1.5 INVESTMENT STRATEGIES 1. Systematic Investment Plan: Under this, a fixed sum is invested each month on a fixed date of a month. Payment is made through post-dated cheques or direct debit facilities. The investor gets fewer units when the NAV is high and more units when the NAV is low. This is called as the benefit of Rupee Cost Averaging (RCA) 2. Systematic Transfer Plan: Under this, an investor invest in debt-oriented fund and give instructions to transfer a fixed sum, at a fixed interval, to an equity scheme of the same mutual fund. 3. Systematic Withdrawal Plan: if someone wishes to withdraw from a mutual fund then he can withdraw a fixed amount each month. 1.6. ORGANISATION OF MUTUAL FUND: Figure:1.4 THE STRUCTURE CONSISTS OF: SPONSOR Sponsor is the person who acting alone or in combination with another body corporate establishes a mutual fund. Sponsor must contribute at least 40% of the net worth of the Investment managed and meet the eligibility criteria prescribed under the Securities and Exchange Board of India (Mutual Fund) Regulations, 1996. The sponsor is not responsible or liable for any loss or shortfall resulting from the operation of the Schemes beyond the initial contribution made by it towards setting up of the Mutual Fund. TRUST The Mutual Fund is constituted as a trust in accordance with the provisions of the Indian Trusts Act, 1882 by the Sponsor. The trust deed is registered under the Indian Registration Act, 1908. TRUSTEE Trustee is usually a company (corporate body) or a Board of Trustees (body of individuals). The main responsibility of the Trustee is to safeguard the interest of the unit holders and ensure that the AMC functions in the interest of investors and in accordance with the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996, the provisions of the Trust Deed and the Offer Documents of the respective Schemes. At least 2/3rd directors of the Trustee are independent directors who are not associated with the Sponsor in any manner. ASSET MANAGEMENT COMPANY (AMC) The AMC is appointed by the Trustee as the Investment Manager of the Mutual Fund. The AMC is required to be approved by the Securities and Exchange Board of India (SEBI) to act as an asset management company of the Mutual Fund. At least 50% of the directors of the AMC are independent directors who are not associated with the Sponsor in any manner. The AMC must have a net worth of at least 10 cores at all times. REGISTRAR AND TRANSFER AGENT The AMC if so authorized by the Trust Deed appoints the Registrar and Transfer Agent to the Mutual Fund. The Registrar processes the application form, redemption requests and dispatches account statements to the unit holders. The Registrar and Transfer agent also handles communications with investors and updates investor records. ASSET UNDER MANAGEMENT: Table1.4 ASSET UNDER MANAGEMENT OF TOP AMC,S as on Jun 30, 2009 Mutual Fund Name No. of Corpus (Rs.Crores) schemes Reliance Mutual Fund 263 108,332.36 HDFC Mutual Fund 202 78,197.90 ICICI Prudential Mutual Fund 325 70,169.46 UTI Mutual Fund 207 67,978.19 Birla Sun Life Mutual Fund 283 56,282.87 SBI Mutual Fund 130 34,061.04 LIC Mutual Fund 70 32,414.92 Kotak Mahindra Mutual Fund 124 30,833.02 Franklin Templeton Mutual Fund 191 25,472.85 IDFC Mutual Fund 164 21,676.29 Tata Mutual Fund 175 21,222.81 The graph indicates the growth of assets over the years. Figure:1.5 1.7 DISTRIBUTION CHANNELS: Mutual funds posses a very strong distribution channel so that the ultimate customers doesn't face any difficulty in the final procurement. The various parties involved in distribution of mutual funds are: 1. Direct marketing by the AMCs: the forms could be obtained from the AMCs directly. The investors can approach to the AMCs for the forms. some of the top AMCs of India are; Reliance ,Birla Sunlife, Tata, SBI magnum, Kotak Mahindra, HDFC, Sundaram, ICICI, Mirae Assets, Canara Robeco, Lotus India, LIC, UTI etc. whereas foreign AMCs include: Standard Chartered, Franklin Templeton, Fidelity, JP Morgan, HSBC, DSP Merill Lynch, etc. 2. Broker/ sub broker arrangements: the AMCs can simultaneously go for broker/subbroker to popularize their funds. AMCs can enjoy the advantage of large network of these brokers and sub brokers. 3. Individual agents, Banks, NBFC: investors can procure the funds through individual agents, independent brokers, banks and several non- banking financial corporations too, whichever he finds convenient for him. 1.8 HDFC AMC COMPANY OVERVIEW HDFC ASSET MANAGEMENT COMPANY LIMITED (AMC) AMC was incorporated under the Companies Act, 1956, on December 10, 1999, and was approved to act as an AMC for the Mutual Fund by SEBI on July 30, 2000. The registered office of the AMC is situated at Ramon House, 3rd Floor, H.T. Parekh Marg, 169, Back bay Reclamation, Church gate, Mumbai - 400 020. In terms of the Investment Management Agreement, the Trustee has appointed HDFC Asset Management Company Limited to manage the Mutual Fund As per the terms of the Investment Management Agreement, the AMC will conduct the operations of the Mutual Fund and manage assets of the schemes, including the schemes launched from time to time. The present share holding pattern of the AMC is as follows: Table:1.5 Particulars % of the paid up capital Housing Development Finance Corporation Limited 50.10 Standard Life Investments Limited 49.90 Zurich Insurance Company (ZIC), the Sponsor of Zurich India Mutual Fund, following a review of its overall strategy, had decided to divest its Asset Management business in India. The AMC had entered into an agreement with ZIC to acquire the said business, subject to necessary regulatory approvals. On obtaining the regulatory approvals, the Schemes of Zurich India Mutual Fund has now migrated to HDFC Mutual Fund on June 19, 2003. The AMC is also providing portfolio management / advisory services and such activities are not in conflict with the activities of the Mutual Fund. The AMC has renewed its registration from SEBI vide Registration No. - PM / INP000000506 dated December 22, 2000 to act as a Portfolio Manager under the SEBI (Portfolio Managers) Regulations, 1993. The Certificate of Registration is valid from January 1, 2004 to December 31, 2006. Board of Directors The Board of Directors of the HDFC Asset Management Company Limited (AMC) consists of the following eminent persons. Table:1.6 Mr. Deepak S. Parekh Mr. N. Keith Skeoch Mr. Keki M. Mistry Mr. James Aird Mr. P. M. Thampi Mr. Humayun Dhanrajgir Dr. Deepak B. Phatak Mr. Hoshang S. Billimoria Mr. Rajeshwar Raj Bajaaj Mr. Vijay Merchant Ms. Renu S. Karnad Chairman of the board CEO of Standard Life Investments Ltd. Associate director Investment director Independent director Independent director Independent director Independent director Independent director Independent director Joint managing director Mr. Milind Barve Managing director Mr. Deepak Parekh, the Chairman of the Board, is associated with HDFC Ltd. in his capacity as its Executive Chairman. Mr. Parekh joined HDFC Ltd. in a senior management position in 1978. He was inducted as Wholetime Director of HDFC Ltd. in 1985 and was appointed as the Executive Chairman in 1993. Mr. N. Keith Skeoch is associated with Standard Life Investments Limited as its Chief Executive and is responsible for all company business and investment operations within Standard Life Investments Limited. Mr. Keki M. Mistry is an associate director on the Board. He is the Vice-Chairman & Managing Director of Housing Development Finance Corporation Limited (HDFC Ltd.) He is with HDFC Ltd. since 1981 and was appointed as the Executive Director of HDFC Ltd. in 1993. He was appointed as the Deputy Managing Director in 1999, Managing Director in 2000 and Vice Chairman & Managing Director in 2007. SPONSORS HOUSING DEVELOPMENT FINANCE CORPORATION LIMITED (HDFC): HDFC was incorporated in 1977 as the first specialised housing finance institution in India. HDFC provides financial assistance to individuals, corporate and developers for the purchase or construction of residential housing. It also provides property related services (e.g. property identification, sales services and valuation), training and consultancy. Of these activities, housing finance remains the dominant activity. HDFC currently has a client base of over 8, 00,000 borrowers, 12, 00,000 depositors, 92,000 shareholders and 50,000 deposit agents. HDFC raises funds from international agencies such as the World Bank, IFC (Washington), USAID, CDC, ADB and KFW, domestic term loans from banks and insurance companies, bonds and deposits. HDFC has received the highest rating for its bonds and deposits program for the ninth year in succession. HDFC Standard Life Insurance Company Limited, promoted by HDFC was the first life insurance company in the private sector to be granted a Certificate of Registration (on October 23, 2000) by the Insurance Regulatory and Development Authority to transact life insurance business in India. HDFC is India's premier housing finance company and enjoys an impeccable track record in India as well as in international markets. Since its inception in 1977, the Corporation has maintained a consistent and healthy growth in its operations to remain the market leader in mortgages. Its outstanding loan portfolio covers well over a million dwelling units. HDFC has developed significant expertise in retail mortgage loans to different market segments and also has a large corporate client base for its housing related credit facilities. With its experience in the financial markets, a strong market reputation, large shareholder base and unique consumer franchise, HDFC was ideally positioned to promote a bank in the Indian environment. STANDARD LIFE INVESTMENTS LIMITED The Standard Life Assurance Company was established in 1825 and has considerable experience in global financial markets. In 1998, Standard Life Investments Limited became the dedicated investment management company of the Standard Life Group and is owned 100% by The Standard Life Assurance Company. With global assets under management of approximately US$186.45 billion as at March 31, 2005, Standard Life Investments Limited is one of the world's major investment companies and is responsible for investing money on behalf of five million retail and institutional clients worldwide. With its headquarters in Edinburgh, Standard Life Investments Limited has an extensive and developing global presence with operations in the United Kingdom, Ireland, Canada, USA, China, Korea and Hong Kong. In order to meet the different needs and risk profiles of its clients, Standard Life Investments Limited manages a diverse portfolio covering all of the major markets world-wide, which includes a range of private and public equities, government and company bonds, property investments and various derivative instruments. The company's current holdings in UK equities account for approximately 2% of the market capitalization of the London Stock Exchange. HDFC MUTUAL FUND PRODUCTS Equity Funds HDFC Growth Fund HDFC Long Term Advantage Fund HDFC Index Fund HDFC Equity Fund HDFC Capital Builder Fund HDFC Tax saver HDFC Top 200 Fund HDFC Core & Satellite Fund HDFC Premier Multi-Cap Fund HDFC Long Term Equity Fund HDFC Mid-Cap Opportunity Fund Balanced Funds HDFC Children's Gift Fund Investment Plan HDFC Children's Gift Fund Savings Plan HDFC Balanced Fund HDFC Prudence Fund Debt Funds HDFC Income Fund HDFC Liquid Fund HDFC Gilt Fund Short Term Plan HDFC Gilt Fund Long Term Plan HDFC Short Term Plan HDFC Floating Rate Income Fund Short Term Plan HDFC Floating Rate Income Fund Long Term Plan HDFC Liquid Fund - PREMIUM PLAN HDFC Liquid Fund - PREMIUM PLUS PLAN HDFC Short Term Plan - PREMIUM PLAN HDFC Short Term Plan - PREMIUM PLUS PLAN HDFC Income Fund Premium Plan HDFC Income Fund Premium plus Plan HDFC High Interest Fund HDFC High Interest Fund - Short Term Plan HDFC Sovereign Gilt Fund - Savings Plan HDFC Sovereign Gilt Fund - Investment Plan HDFC Sovereign Gilt Fund - Provident Plan HDFC Cash Management Fund - Savings Plan HDFC Cash Management Fund - Call Plan HDFCMF Monthly Income Plan - Short Term Plan HDFCMF Monthly Income Plan - Long Term Plan HDFC Cash Management Fund - Savings Plus Plan HDFC Multiple Yield Fund HDFC Multiple Yield Fund Plan 2005 ACHIEVEMENT AND AWARDS CNBC - TV 18 - CRISIL Mutual Fund of the Year Awards 2008 : HDFC Prudence Fund was the only scheme that won the CNBC - TV 18 - CRISIL Mutual Fund of the Year Award 2008 in the Most Consistent Balanced Fund under CRISIL ~ CPR for the calendar year 2007 (from amongst 3 schemes). HDFC Cash Management Fund - Savings Plan was the only scheme that won the CNBC TV 18 - CRISIL Mutual Fund of the Year Award 2008 in the Most Consistent Liquid Fund under CRISIL ~ CPR for the calendar year 2007 (from amongst 5 schemes). HDFC Cash Management Fund - Savings Plan was the only scheme that won the CNBC - TV 18 - CRISIL Mutual Fund of the Year Award 2008 in the Liquid Scheme – Retail Category for the calendar year 2007 (from amongst 19 schemes). Lipper Fund Awards 2008: HDFC Equity Fund - Growth has been awarded the 'Best Fund over Ten Years' in the 'Equity India Category' at the Lipper Fund Awards 2008 (form amongst 23 schemes). It was awarded the Best Fund over ten years in 2006 and 2007 as well. 2008 makes it three in a row. Lipper Fund Awards 2009 : HDFC Equity Fund - Growth has been awarded the 'Best Fund over Ten Years' in the 'Equity India Category' (form amongst 34 schemes) and HDFC Prudence Fund – Growth Plan in the 'Mixed Asset INR Aggressive Category' (from amongst 6 schemes), have been awarded the 'Best Fund over 10 Years' by Lipper Fund Awards India 2009. ICRA Mutual Fund Awards – 2008 : HDFC MF Monthly Income Plan - Long Term Plan - Ranked a Seven Star Fund and has been awarded the Gold Award for "Best Performance" in the category of "Open Ended Marginal Equity" for the three year period ending December 31, 2007 (from amongst 27 schemes) HDFC High Interest Fund - Short Term Plan - Ranked a Five Star Fund indicating performance among the top 10% in the category of "Open Ended Debt - Short Term" for one year period ending December 31, 2007 (from amongst 20 schemes). HDFC Prudence Fund - Ranked a Five Star Fund indicating performance among the top 10% in the category of "Open Ended Balanced" for the three year period ending December 31, 2007 (from amongst 16 schemes) B. MEASURING AND EVALUATING MUTUAL FUNDS PERFORMANCE: 1.2.1 PURPOSE OF MEASURING AND EVALUATING Every investor investing in the mutual funds is driven by the motto of either wealth creation or wealth increment or both. Therefore it's very necessary to continuously evaluate the funds' performance with the help of factsheets and newsletters, websites, newspapers and professional advisors like HDFC AMC. If the investors ignore the evaluation of funds' performance then he can lose hold of it any time. In this ever-changing industry, he can face any of the following problems: 1. Variation in the funds' performance due to change in its management/ objective. 2. The funds' performance can slip in comparison to similar funds. 3. There may be an increase in the various costs associated with the fund. 4 .Beta, a technical measure of the risk associated may also surge. 5. The funds' ratings may go down in the various lists published by independent rating agencies. 6. It can merge into another fund or could be acquired by another fund house. Performance measures: Equity funds: the performance of equity funds can be measured on the basis of: NAV Growth, Total Return; Total Return with Reinvestment at NAV, Annualized Returns and Distributions, Computing Total Return (Per Share Income and Expenses, Per Share Capital Changes, Ratios, Shares Outstanding), the Expense Ratio, Portfolio Turnover Rate, Fund Size, Transaction Costs, Cash Flow, Leverage. Debt fund: Likewise, the performance of debt funds can be measured on the basis of: Peer Group Comparisons, The Income Ratio, Industry Exposures and Concentrations, NPAs, besides NAV Growth, Total Return and Expense Ratio. Liquid funds: the performance of the highly volatile liquid funds can be measured on the basis of: Fund Yield, besides NAV Growth, Total Return and Expense Ratio. Concept of benchmarking for performance evaluation: Every fund sets its benchmark according to its investment objective. The funds performance is measured in comparison with the benchmark. If the fund generates a greater return than the benchmark then it is said that the fund has outperformed benchmark , if it is equal to benchmark then the correlation between them is exactly 1. And if in case the return is lower than the benchmark then the fund is said to be underperformed. Some of the benchmarks are: 1. Equity funds: market indices such as S&P CNX nifty, BSE100, BSE200, BSE-PSU, BSE 500 index, BSE bankex, and other sectoral indices. 2. Debt funds: Interest Rates on Alternative Investments as Benchmarks, I-Bex Total Return Index, JPM T-Bill Index Post-Tax Returns on Bank Deposits versus Debt Funds. 3. Liquid funds: Short Term Government Instruments' Interest Rates as Benchmarks, JPM T- Bill Index. To measure the fund's performance, the comparisons are usually done with: I) with a market index. ii) Funds from the same peer group. iii) Other similar products in which investors invest their funds. 1.2.2 FINANCIAL PLANNING FOR INVESTORS REFERRING TO MUTUAL FUNDS: Investors are required to go for financial planning before making investments in any mutual fund. The objective of financial planning is to ensure that the right amount of money is available at the right time to the investor to be able to meet his financial goals. It is more than mere tax planning. Steps in financial planning are: Asset allocation. Selection of fund. Studying the features of a scheme. In case of mutual funds, financial planning is concerned only with broad asset allocation, leaving the actual allocation of securities and their management to fund managers. A fund manager has to closely follow the objectives stated in the offer document, because financial plans of users are chosen using these objectives. 1.2.3 WHY HAS IT BECOME ONE OF THE LARGEST FINANCIAL INSTRUMENTS? If we take a look at the recent scenario in the Indian financial market then we can find the market flooded with a variety of investment options which includes mutual funds, equities, fixed income bonds, corporate debentures, company fixed deposits, bank deposits, PPF, life insurance, gold, real estate etc. all these investment options could be judged on the basis of various parameters such as- return, safety convenience, volatility and liquidity. Measuring these investment options on the basis of the mentioned parameters, we get this in a tabular form Table:1.7 Return Safety Volatility Liquidity Convenienc e Equity High Low High High Moderate Bonds Moderate High Moderate Moderate High Co. Moderate Debent ures Moderate Moderate Low Low Co. FDs Moderate Low Low Low Moderate Bank Deposi ts Low High Low High High PPF Moderate High Low Moderate High Life Insura nce Low High Low Low Moderate Gold Moderate High Moderate Moderate Gold Real Estate High Moderate High Low Low Mutual Funds High High Moderate High High We can very well see that mutual funds outperform every other investment option. On three parameters, it scores high whereas it's moderate at one. comparing it with the other options, we find that equities gives us high returns with high liquidity but its volatility too is high with low safety which doesn't makes it favourite among persons who have low risk- appetite. Even the convenience involved with investing in equities is just moderate. Now looking at bank deposits, it scores better than equities at all fronts but lags badly in the parameter of utmost important ie; it scores low on return , so it's not an happening option for person who can afford to take risks for higher return. The other option offering high return is real estate but that even comes with high volatility and moderate safety level, even the liquidity and convenience involved are too low. Gold have always been a favourite among Indians but when we look at it as an investment option then it definitely doesn't gives a very bright picture. Although it ensures high safety but the returns generated and liquidity are moderate. Similarly, the other investment options are not at par with mutual funds and serve the needs of only a specific customer group. Straightforward, we can say that mutual fund emerges as a clear winner among all the options available. The reasons for this being: I)Mutual funds combine the advantage of each of the investment products: mutual fund is one such option which can invest in all other investment options. Its principle of diversification allows the investors to taste all the fruits in one plate. just by investing in it, the investor can enjoy the best investment option as per the investment objective. II) Dispense the shortcomings of the other options: every other investment option has more or less some shortcomings. Such as if some are good at return then they are not safe, if some are safe then either they have low liquidity or low safety or both.likewise, there exists no single option which can fit to the need of everybody. But mutual funds have definitely sorted out this problem. Now everybody can choose their fund according to their investment objectives. III) Returns get adjusted for the market movements: as the mutual funds are managed by experts so they are ready to switch to the profitable option along with the market movement. Suppose they predict that market is going to fall then they can sell some of their shares and book profit and can reinvest the amount again in money market instruments. IV) Flexibility of invested amount: Other then the above mentioned reasons, there exists one more reason which has established mutual funds as one of the largest financial intermediary and that is the flexibility that mutual funds offer regarding the investment amount. One can start investing in mutual funds with amount as low as Rs. 500 through SIPs and even Rs. 100 in some cases. Not all award-winning funds may be suitable for everyone Many investors feel that a simple way to invest in Mutual funds is to just keep investing in award winning funds. First of all, it is important to understand that more than the awards; it is the methodology to choose winners t at is more relevant. A rating firm generally elaborates on the criteria for deciding the winner's i.e. consistent performance, risk adjusted returns, total returns and protection of capital. Each of these factors is very important and ha s its significance for different categories of funds. Besides, each of these factors has varying degree of significance for different kinds of investors. For example, consistent return re ally focuses on risk. If someone is afraid of negative returns, consistency will be a more import ant measure than tot al ret urn i.e. Growth in NAV as well as dividend received. A fund can have very impressive total ret urns overtime, but can be very volatile and tough for a risk adverse investor. Therefore, all the ward winning funds in different categories may not be suitable for everyone. Typically, when one has to select funds, the first step should be to consider personal goals and objectives. Invest ors need to decide which element they value the most and the n prioritize the other criteria Once one knows what one is looking for, one should go about selecting the funds according to the asset allocation. Most investors need just a few funds, carefully picked, watched and managed over period of time. 1.2.4 EVALUATING PORTFOLIO PERFORMANCE It is important to evaluate the performance of the portfolio on an on-going basis. The following factors are important in this process: Consider long-term record of accomplishment rather than short -term performance. It is important because long-term track record moderates the effects which unusually good or bad short -term performance can have on a fund's track record. Besides, longer-term track record compensates for the effects of a fund manager's particular investment style. Evaluate the record of accomplishment against similar funds. Success in managing a small or in a fund focusing on a particular segment of the market cannot be re lied upon as an evidence of anticipated performance in managing a large or a broad based fund. Discipline in investment approach is an important factor as the pressure to perform can make a fund manager susceptible to have a n urge to change tracks in terms of stock selection as well a s investment strategy. The objective should be to differentiate investment skill of the fund manager from luck and to identify those funds with the greatest potential of future success. 1.2.5 HOW TO REDUCE RISK WHILE INVESTING: Any kind of investment we make is subject to risk. In fact we get return on our investment purely and solely because at the very beginning we take the risk of parting with our funds, for getting higher value back at a later date. Partition it self is a risk. Well known economist and Nobel Prize recipient William Sharpe tried to segregate the total risk faced in any kind of investment into two parts - systematic (Systemic) risk and unsystematic (Unsystematic) risk. Systematic risk is that risk which exists in the system. Some of the biggest examples of systematic risk are inflation, recession, war, political situation etc. Inflation erodes returns generated from all investments e .g. If return from fixed deposit is 8 percent and if inflation is 6 per cent then real rate of return from fixed deposit is reduced by 6 percent. Similarly if returns generated from equity market is 18 percent and inflation is still 6 per cent then equity returns will be lesser by the rate of inflation. Since inflation exists in the system there is no way one can stay away from the risk of inflation. Economic cycles, war and political situations have effects on all forms of investments. Also these exist in the system and there is no way to stay away from them. It is like learning to walk. Anyone who wants to learn to walk has to first fall; you cannot learn to walk without falling. Similarly, anyone who wants to invest has to first face systematic risk. Therefore, one can never make any kind of investment without systematic risk. Another form of risk is unsystematic risk. This risk does not exist in the system and hence is not applicable to all forms of investment. Unsystematic risk is associated with particular form of investment. Suppose we invest in stock market and the market falls, then only our investment in equity gets affected OR if we have placed a fixed deposit in particular bank and bank goes bankrupt, than we only lose money placed in that bank. While there is no way to keep away from risk, we can always reduce the impact of risk. Diversification helps in reducing the impact of unsystematic risk. If our investment is distributed across various asset classes, the impact of unsystematic risk is reduced. If we have placed fixed deposit in several banks, then even if one of the banks goes bankrupt our entire fixed de posit investment is not lost. Similarly if our equity investment is in Tata Motors, HLL, Infosys, adverse news about Infosys will only impact investment in Infosys, all other stocks will not have any impact . To reduce the impact of systematic risk, we should invest regularly. By investing regularly, we average out the impact of risk. Mutual fund, as an investment vehicle gives us benefit diversification and averaging. of both Portfolio of mutual funds consists of multiple securities and hence adverse news about single security will have nominal impact on overall portfolio. By systematically investing in mutual fund, we get benefit of rupee cost averaging. Mutual fund as an investment vehicle helps reduce, both, systematic as well a s unsystematic risk 1.2.6 A STUDY OF PORTFOLIO ANALYSIS FROM THE POINT OF FUND MANAGER: Effective use of portfolio management disciplines improves customer satisfaction, reduces the number of risks problems, and increases success. The goal of portfolio analysis is to realize these same benefits at the portfolio level by applying a consistent structured management approach. The considerations underlying the portfolio analysis is a matter of concern to the fund managers, investors, and researchers alike. This study attempts to answer two questions relating to the portfolio analysis: • Make an average (or fair) return for the level of risk in the portfolio • To find out the portfolio which best meets the purpose of the investor. At a minimum, any comprehensive mutual fund selection and analysis approach should include the following generalized processes: • Fund selection • Fund prioritize/ reprioritize • Selection of the acceptable and required fund • Fund analysing and monitoring • Corrective action management The fund portfolio analysis gives the ability to select funds that are aligned with the investor's strategies and objectives. It helps the fund manager to make the best use of available opportunities by applying to the highest priority of the investor. A fund manager can regularly assess how securities and stocks are contributing to portfolio health and can make the corrective action to keep the portfolio in compliance with the investor's interest and objectives. Mutual funds do not determine risk preference. However, once investor determines his/her return preferences, he/she can choose a mutual fund a large and growing variety of alternative funds designed to meet almost any investment goal. Studies have showed that the funds generally were consistent in meeting investors stated goals for investment strategies, risk, and return. The major benefit of the mutual fund is to diversify the portfolio to eliminate unsystematic risk. The instant diversification of the funds is especially beneficial to the small investors who do not have the resources to acquire 100 shares of 12 or 15 different issues required to reduce unsystematic risk. Mutual funds have generally maintained the stability of their correlation with the market because of reasonably well diversified portfolios. There are some measures for the analysis and each of them provides unique perspectives. These measures evaluate the different components of performance. 1.2.7 MEASURES OF RISK AND RETURN: Risk is variability in future cash flows. It is also known as uncertainty in the distribution of possible outcomes. A risky situation is one, which has some probability of loss or unexpected results. The higher the probability of loss or unexpected results is, the greater the risk. It is the uncertainty that an investment will earn its expected rate of return. For an investor, evaluating a future investment alternative expects or anticipates a certain rate of return is very important. Portfolio risk management includes processes that identify, analyse, respond to, track, and control any risk that would prevent the portfolio from achieving its business objectives. These processes should include reviews of project level risks with negative implications for the portfolio, ensuring that the project manager has a responsible risk mitigation plan. Additionally, it is important to do a consolidated risk assessment for the portfolio overall to determine whether it is within the already specified limits. Since portfolio and their environments are dynamic, managers should review and update their portfolio risk management plans on a regular basis through the fund life cycle. Simple measure of returns: The return on mutual fund investment includes both income (in the form of dividends or investment payments) and capital gains or losses (increase or decrease in the value of a security). The return is calculated by taking the change in a fund's Net Asset Value, which is the market value of securities the fund holds divided by the number of the fund's shares during a given time period, assuming the reinvestment all income and capital gains distributions, and dividing it by the original net asset value. The return is calculated net of management fees and other expenses charged to the fund. Thus, a fund's monthly return can be expressed as follows: Rt= (NAVt- NAVt-1)/NAVt-1 Where, Rt is the return in month t NAVt is the closing net asset value of the fund on the last trading day of the month NAVt-1 is the closing net asset value of the fund on the last day of the previous month Measure of risk Investors are interested not only in fund's return but also in risk taken to achieve those returns. So risk can be thought as the uncertainty of the expected return, and uncertainty is generally equated with variability. Variability and the risk are correlated; hence high returns will tend to high variability. Standard deviation: in simple terms standard deviation is one of the commonly used statistical parameter to measure risk, which determines the volatility of a fund. Deviation is defined as any variation from a mean value (upward & downward). Since the markets are volatile, the returns fluctuate every day. High standard deviation of a fund implies high volatility and a low standard deviation implies low volatility. S.D. =√1/T× (Rt-AR) ² Where, S.D. is the periodic standard deviation, AR is the average periodic return, T is the number of observations in the period for which the standard deviation is being calculated. Rt is the return in month t Beta analysis: ) β(Beta) Co-efficient: Systematic risk is measured in terms of Beta, which represents fluctuations in the NAV of the fund vis-à-vis market. The more responsive the NAV of a Mutual Fund is to the changes in the market; higher will be its beta. Beta is calculated by relating the returns on a Mutual Fund with the returns in the market. While unsystematic risk can be diversified through investments in a number of instruments, systematic risk cannot. By using the risk return relationship, we try to assess the competitive strength of the Mutual Funds vis-à-vis one another in a better way. β(Beta) is calculated as = [N (ΣXY) – ΣXΣY]/ [N (ΣX2) – (ΣX) 2 ] Beta is used to measure the risk. It basically indicates the level of volatility associated with the fund as compared to the market. In case of funds, as compared to the market. In case of funds, beta would indicate the volatility against the benchmark index. It is used as a short term decision making tool. A beta that is greater than 1 means that the fund is more volatile than the benchmark index, while a beta of less than 1 means that the fund is more volatile than the benchmark index. A fund with a beta very close to 1 means the fund's performance closely matches the index or benchmark. The success of beta is heavily dependent on the correlation between a fund and its benchmark. Thus, if the fund's portfolio doesn't have a relevant benchmark index then a beta would be grossly inappropriate. For example if we are considering a banking fund, we should look at the beta against a bank index. R-Squared (R2): R squared is the square of 'R' (i.e.; coefficient of correlation). It describes the level of association between the fun's market volatility and market risk. The value of R- squared ranges from0 to1. A high R- squared (more than 0.80) indicates that beta can be used as a reliable measure to analyze the performance of a fund. Beta should be ignored when the rsquared is low as it indicates that the fund performance is affected by factors other than the markets. For example: Case 1 Case 2 R2 0.65 0.88 B 1.2 0.9 In the above tableR2 is less than 0.80 in case 1, implies that it would be wrong to mention that the fund is aggressive on account of high beta. In case 2, the r- squared is more than 0.85 and beta value is 0.9. it means that this fund is less aggressive than the market. ďƒ˜ Portfolio turnover ratio: Portfolio turnover is a measure of a fund's trading activity and is calculated by dividing the lesser of purchases or sales (excluding securities with maturities of less than one year) by the average monthly net assets of the fund. Turnover is simply a measure of the percentage of portfolio value that has been transacted, not an indication of the percentage of a fund's holdings that have been changed. Portfolio turnover is the purchase and sale of securities in a fund's portfolio. A ratio of 100%, then, means the fund has bought and sold all its positions within the last year. Turnover is important when investing in any mutual fund, since the amount of turnover affects the fees and costs within the mutual fund. Total expenses ratio: A measure of the total costs associated with managing and operating an investment fund such as a mutual fund. These costs consist primarily of management fees and additional expenses such as trading fees, legal fees, auditor fees and other operational expenses. The total cost of the fund is divided by the fund's total assets to arrive amount, which represents the TER: Total expense ratio = (Total fund Costs/ Total fund Assets) The most important and widely used measures of performance are: The Sharpe Measure The Treynor'Measure Jenson Model Fama Model ďƒ˜ The Sharpe Measure :- at a percentage In this model, performance of a fund is evaluated on the basis of Sharpe Ratio, which is a ratio of returns generated by the fund over and above risk free rate of return and the total risk associated with it. According to Sharpe, it is the total risk of the fund that the investors are concerned about. So, the model evaluates funds on the basis of reward per unit of total risk. Symbolically, it can be written as: Sharpe Ratio (Si) = (Ri - Rf)/Si Where, Si is standard deviation of the fund, Ri represents return on fund, and Rf is risk free rate of return. While a high and positive Sharpe Ratio shows a superior risk-adjusted performance of a fund, a low and negative Sharpe Ratio is an indication of unfavourable performance. ďƒ˜ The Treynor Measure: Developed by Jack Treynor, this performance measure evaluates funds on the basis of Treynor's Index. This Index is a ratio of return generated by the fund over and above risk free rate of return (generally taken to be the return on securities backed by the government, as there is no credit risk associated), during a given period and systematic risk associated with it (beta). Symbolically, it can be represented as: Treynor's Index (Ti) = (Ri - Rf)/Bi. Where, Ri represents return on fund, Rf is risk free rate of return, and Bi is beta of the fund. All risk-averse investors would like to maximize this value. While a high and positive Treynor's Index shows a superior risk-adjusted performance of a fund, a low and negative Treynor's Index is an indication of unfavorable performance. Comparison of Sharpe and Treynor Sharpe and Treynor measures are similar in a way, since they both divide the risk premium by a numerical risk measure. The total risk is appropriate when we are evaluating the risk return relationship for well-diversified portfolios. On the other hand, the systematic risk is the relevant measure of risk when we are evaluating less than fully diversified portfolios or individual stocks. For a well-diversified portfolio the total risk is equal to systematic risk. Rankings based on total risk (Sharpe measure) and systematic risk (Treynor measure) should be identical for a well-diversified portfolio, as the total risk is reduced to systematic risk. Therefore, a poorly diversified fund that ranks higher on Treynor measure, compared with another fund that is highly diversified, will rank lower on Sharpe Measure. ďƒ˜ Jenson Model: Jenson's model proposes another risk adjusted performance measure. This measure was developed by Michael Jenson and is sometimes referred to as the differential Return Method. This measure involves evaluation of the returns that the fund has generated vs. the returns actually expected out of the fund1 given the level of its systematic risk. The surplus between the two returns is called Alpha, which measures the performance of a fund compared with the actual returns over the period. Required return of a fund at a given level of risk (Bi) can be calculated as: E(Ri) = Rf + Bi (Rm - Rf) Where, E(Ri) represents expected return on fund, and Rm is average market return during the given period, Rf is risk free rate of return, and Bi is Beta deviation of the fund. After calculating it, Alpha can be obtained by subtracting required return from the actual return of the fund. Îąp= Ri –[ Rf + Bi (Rm - Rf) ] Higher alpha represents superior performance of the fund and vice versa. Limitation of this model is that it considers only systematic risk not the entire risk associated with the fund and an ordinary investor cannot mitigate unsystematic risk, as his knowledge of market is primitive. ďƒ˜ Fama Model: The Eugene Fama model is an extension of Jenson model. This model compares the performance, measured in terms of returns, of a fund with the required return commensurate with the total risk associated with it. The difference between these two is taken as a measure of the performance of the fund and is called Net Selectivity. The Net Selectivity represents the stock selection skill of the fund manager, as it is the excess returns over and above the return required to compensate for the total risk taken by the fund manager. Higher value of which indicates that fund manager has earned returns well above the return commensurate with the level of risk taken by him. Selectivity: measures the ability of the portfolio manager to earn a return that is consistent with the portfolio's market (systematic) risk. The selectivity measure is: Ri –[ Rf + Bi (Rm - Rf) ] Diversification: measures the extent to which the portfolio may not have been completely diversified. Diversification is measured as: [Rf +(Rm - Rf)(αi/ αm)]-[Rf + Bi (Rm - Rf)] If the portfolio is completely diversified, contains no unsystematic risk, then diversification measure would be zero. A positive diversification measure indicates that the portfolio is not completely diversified; it would contain unsystematic risk and it represents the extra return that the portfolio should earn for not being completely diversified. The performance of the portfolio can be measured as: Net selectivity = selectivity – diversification Net selectivity measures, how well the portfolio mangers did manager did at earning a fair return for the portfolio' systematic risk and diversifying away unsystematic risk. Positive net selectivity indicates that the fund earned a better return. The comparison, done based on sharpe ratio, Treynor measure, Jensen alpha, and Fema measure notifies that the portfolio performance can be evaluated on the following basis: Sahrpe ratio: measures the reward to total risk trade off Treynor: measures the reward to systematic risk trade off Jensen's alpha: measures the average return over and above that predicted. Fema measure: measures return of portfolio for its systematic risk and diversifying away unsystematic risk. Among the above performance measures, two models namely, Treynor measure and Jenson model use Systematic risk is based on the premise that the Unsystematic risk is diversifiable. These models are suitable for large investors like institutional investors with high risk taking capacities as they do not face paucity of funds and can invest in a number of options to dilute some risks. For them, a portfolio can be spread across a number of stocks and sectors. However, Sharpe measure and Fama model that consider the entire risk associated with fund are suitable for small investors, as the ordinary investor lacks the necessary skill and resources to diversify. Moreover, the selection of the fund on the basis of superior stock selection ability of the fund manager will also help in safeguarding the money invested to a great extent. The investment in funds that have generated big returns at higher levels of risks leaves the money all the more prone to risks of all kinds that may exceed the individual investors' risk appetite. PART-II RESEARCH METHODOLOGY 2.1 NEED FOR THE STUDY The Mutual Fund Companies periodically build up a study, which can prioritize and analyse the portfolio of the mutual funds. This study is helpful in having a comparison among the mutual funds based on the risk bearing capacity and expected return of the investor and will also carry out an analysis of the portfolio of the selected mutual fund. The mutual fund industry is growing globally and new products are emerging in the market with all captivating promises of providing high return. It has become difficult for the investors to choose the best fund for their needs or in other words to find out a fund which will give maximum return for minimum risk. Therefore, they turn to their financial adviser to get precise direct investment. Hence, the company asked me to prepare a model, which will facilitate them to analyse the fund and to have reasonable estimation for the fund performance. The driving force of Mutual Funds is the 'safety of the principal' guaranteed, plus the added advantage of capital appreciation together with the income earned in the form of interest or dividend. The various schemes of Mutual Funds provide the investor with a wide range of investment options according to his risk bearing capacities and interest besides; they also give handy return to the investor. Mutual Funds offers an investor to invest even a small amount of money, each Mutual Fund has a defined investment objective and strategy. Mutual Funds schemes are managed by respective asset managed companies, sponsored by financial institutions, banks, private companies or international firms. A Mutual Fund is the ideal investment vehicle for today's complex and modern financial scenario. The study is basically made to analyze the various open-ended equity schemes of HDFC Asset Management Company to highlight the diversity of investment that Mutual Fund offer. Thus, through the study one would understand how a common person could fruitfully convert a meagre amount into great penny by wisely investing into the right scheme according to his risk taking abilities. Sharpe ratio is a performance measure, which reflects the excess return earned on a portfolio per unit of its total risk (standard deviation). Treynor measure indicates the risk premium return per unit risk of the portfolio. While Jensen alpha talks about the deviation of the actual return from its expected one. Fema measure decomposes the portfolio total return into two main components: systematic return and the unsystematic return. It determines whether the portfolio is perfectly diversified or not. Hence, it is a significant measure to evaluate the performance of the fund manager. The analysis of the fund portfolio has been done to find out the influence of the top holdings on the performance of the fund. All these measures give fair implication and results about the portfolio performance and can show the ground reality to a rational investor. 2.2 OBJECTIVE OF THE STUDY ďƒ˜ Whether the growth oriented Mutual Fund are earning higher returns than the benchmark returns (or market Portfolio/Index returns) in terms of risk. Whether the growth oriented mutual funds are offering the advantages of Diversification, Market timing and Selectivity of Securities to their investors This study provides a proper investigation for logical and reasonable comparison and selection of the funds. It also assists in analysing the portfolio of the selected funds. 2.3 LIMITATIONS OF THE STUDY The study is limited only to the analysis of different schemes and its suitability to different investors according to their risk-taking ability. The study is based on secondary data available from monthly fact sheets, websites and other books, as primary data was not accessible. The study is limited by the detailed study of six schemes of HDFFC. Many investors are all price takers. The assumption that all investors have the same information and beliefs about the distribution of returns. Banks are free to accept deposits at any interest rate within the ceilings fixed by the Reserve Bank of India and interest rate can vary from client to client. Hence, there can be inaccuracy in the risk free rates. The study excludes the entry and the exit loads of the mutual funds. 2.4 DATA COLLECTION The Methodology involves the selected Open-Ended equity schemes of HDFC mutual fund for the purpose of risk return and comparative analysis the competitive funds. The data collected for this project is basically from secondary sources, they are; The monthly fact sheets of HDFC AMC fund house and research reports from banks. The NAVs of the funds have been taken from AMFI websites for the period starting from 31 st jan 2007 to 31st May, 2009. For the Benchmark prices, data has been taken from BSE and NSE sites. Part-III CASE ANALYSIS 3.1 DATA INTERPRETATION Risk returns analysis and comparative study of funds In this section, a sample of HDFC equity related funds have been studied, evaluated and analysed. This study could facilitate to get a fair comparison. The expectations of the study are to give value to the funds by keeping the risk in the view. Here equity funds are taken as they bear high return with high risk. Following are the products of HDFC Mutual Fund, which have been taken the evaluation purpose. HDFC Equity Fund Growth option HDFC Capital Builder HDFC Growth Fund HDFC Long Term Advantage Fund HDFC Top 200 Fund HDFC EQUITY FUND Investment Objective The investment objective of the Scheme is to achieve capital appreciation. Basic Scheme Information Table:3.1 Nature of Scheme Open Ended Growth Scheme Inception Date Jan 01, 1995 Option/Plan Dividend Option, Growth Option, Entry Load NIL (purchase / additional purchase / switch- (With effect from August 1, 2009) in) Exit Load. Nil (as a % of the Applicable NAV) Minimum Application Amount Rs.5000 and in multiples of Rs.100 thereof to open an account / folio. Additional purchases is Rs. 1000 and in multiples of Rs. 100 thereof Lock-In-Period Nil Net Asset Value Periodicity Every Business Day Redemption Proceeds Normally despatched within 3 Business days Investment Pattern The asset allocation under the Scheme will be as follows: Table:3.2 SR NO. TYPE OF INSTRUMENTS NORMAL ALLOCATION (%of net asset) 1 Equities & Equities related RISK PROFILE 80-100 Medium to high 0-100 Low to medium instruments 2 Debt securities, money market instruments & cash Investment in Securitised debt, if undertaken, would not exceed 20% of the net assets of the scheme. The Scheme may also invest upto 25% of net assets of the Scheme in derivatives such as Futures & Options and such other derivative instruments as may be introduced from time to time for the purpose of hedging and portfolio balancing and other uses as may be permitted under the Regulations. Investment Strategy & Risk Control In order to provide long term capital appreciation, the Scheme will invest predominantly in growth companies. Companies selected under this portfolio would as far as practicable consist of medium to large sized companies which: are likely achieved above average growth than the industry; enjoy distinct competitive advantages, and have superior financial strengths. The aim will be to build a portfolio, which represents a cross-section of the strong growth companies in the prevailing market. In order to reduce the risk of volatility, the Scheme will diversify across major industries and economic sectors. Benchmark Index : S&P CNX 500. HDFC Equity, which is benchmarked to S&P CNX 500 Index is not sponsored, endorsed, sold or promoted by Indian Index Service & Products Limited (IISL). Fund Manager : Mr. Prashant Jain HDFC EQUITY FUND-GROWTH OPTION Table:3.3 NAV S&P Ri Rm Ri Rm CNX Rm-Rm sqr(Rm- av Rm av) Rm2 500 2007 151.389 4899.39 FEB 141.228 4504.73 -6.71185 -8.05529 54.06587 -9.0864 82.56268 64.88767 MAR 142.602 4605.89 0.972895 2.24564 2.184771 1.214527 1.475077 5.042897 APL 151.16 4934.46 6.001318 7.133692 42.81156 6.10258 37.24148 50.88956 MAY 161.281 5185.95 6.695554 5.096606 34.1246 4.065494 16.52824 25.9754 JUN 165.313 5223.82 2.499984 0.730242 1.825594 -0.30087 0.090523 0.533254 JULY 172.325 5483.25 4.241651 4.966289 21.06526 3.935177 15.48562 24.66403 AUG 168.827 5411.29 -2.02989 -1.31236 2.663941 -2.34347 5.491863 1.72229 SEP 182.84 6094.11 8.300213 12.61843 104.7357 11.58732 134.266 159.2248 OCT 210.3 7163.3 15.0186 17.54465 263.4959 16.51353 272.6968 307.8146 NOV 206.176 6997.6 -1.96101 -2.31318 4.536164 -3.34429 11.18429 5.3508 DEC 223.324 7461.48 8.317166 6.62913 55.13557 5.598018 31.3378 43.94536 2008 188.42 6245.45 -15.6293 -16.2974 254.7177 -17.3285 300.2786 265.6065 FEB 187.594 6356.92 -0.43838 1.784819 -0.78243 0.753707 0.568075 3.18558 MAR 165.788 5762.88 -11.624 -9.34478 108.6241 -10.3759 107.6591 87.32486 APL 178.191 6289.07 7.481241 9.130678 68.3088 8.099566 65.60296 83.36928 MAY 169.605 5937.81 -4.81843 -5.58525 26.91209 -6.61636 43.77619 31.19497 JAN JAN JUN 143.171 4929.98 -15.5856 -16.9731 264.5363 -18.0042 324.1514 288.0859 JULY 151.715 5297.47 5.967689 7.454188 44.48428 6.423076 41.25591 55.56493 AUG 158.924 5337.28 4.751673 0.751491 3.570838 -0.27962 0.078188 0.564738 SEP 145.721 4807.2 -8.30774 -9.93165 82.50962 -10.9628 120.1822 98.63768 OCT 110.322 3539.57 -24.2923 -26.3694 640.5738 -27.4005 750.7883 695.3455 NOV 101.808 3379.53 -7.71741 -4.52145 34.8939 -5.55257 30.83098 20.44354 DEC 112.377 3635.87 10.38131 7.585078 78.74302 6.553966 42.95447 57.53341 2009 103.754 3538.57 -7.67328 -2.67611 20.53456 -3.70723 13.74352 7.161582 FEB 98.163 3403.33 -5.38871 -3.82188 20.59501 -4.85299 23.55156 14.60679 MAR 108.852 3720.51 10.88903 9.319696 101.4825 8.288584 68.70062 86.85673 APL 127.097 4278.54 16.76129 14.99875 251.3984 13.96764 195.0949 224.9625 MAY 169.897 5480.11 33.67507 28.08365 945.7186 27.05253 731.8396 788.6911 Total 29.7767 28.87114 3533.466 0 3469.417 3499.186 average 1.063454 1.031112 126.1952 0 123.9077 JAN Figure:3.1 σm= √123.9077 =11.13239 β(Beta) =[N (ΣXY) – ΣXΣY ]/[ N (ΣX2) – (ΣX) 2 ] = (98937.047- 859.6872)/( 97977.214- 833.54264) = 98077.36/ 97143.672 = 1.0096114 Table:3.4 Ri Rm Ri-Rm Dev frm ave sq of Dev frm av FEB -6.71185 -8.05529 1.34344 -1.3111 1.71898 MAR 0.972895 2.24564 -1.27274 1.305086 1.70325 APL 6.001318 7.133692 -1.13237 1.164715 1.356561 MAY 6.695554 5.096606 1.598948 -1.56661 2.454256 JUN 2.499984 0.730242 1.769742 0.75698 0.573018 JULY 4.241651 4.966289 -0.72464 0.75698 0.573018 AUG -2.02989 -1.31236 -0.71753 0.749866 0.5623 SEP 8.300213 12.61843 -4.31822 4.350562 18.92739 OCT 15.0186 17.54465 -2.52605 2.558392 6.545367 NOV -1.96101 -2.31318 0.352172 -0.31983 0.102291 2007 JAN DEC 8.317166 6.62913 1.688036 -1.65569 2.741324 2008 -15.6293 -16.2974 0.668127 -0.63579 0.404223 FEB -0.43838 1.784819 -2.2232 2.255543 5.087475 MAR -11.624 -9.34478 -2.27926 2.311604 5.343511 APL 7.481241 9.130678 -1.64944 1.681778 2.828377 MAY -4.81843 -5.58525 0.76682 -0.73448 0.539459 JUN -15.5856 -16.9731 1.387467 -1.35513 1.836366 JULY 5.967689 7.454188 -1.4865 1.518841 2.306878 AUG 4.751673 0.751491 4.000182 -3.96784 15.74376 SEP -8.30774 -9.93165 1.623906 -1.59156 2.533078 OCT -24.2923 -26.3694 2.077092 -2.04475 4.181006 NOV -7.71741 -4.52145 -3.19596 3.228297 10.4219 DEC 10.38131 7.585078 2.796228 -2.76389 7.639067 2009 -7.67328 -2.67611 -4.99717 5.029507 25.29594 FEB -5.38871 -3.82188 -1.56683 1.599166 2.557333 MAR 10.88903 9.319696 1.569336 -1.53699 2.362352 APL 16.76129 14.99875 1.76254 -1.7302 2.993588 MAY 33.67507 28.08365 5.591422 -5.55908 30.90337 Total 29.7767 28.87114 0.90556 160.2354 avrage 1.063454 1.031112 0.032341 5.722694 JAN JAN Standard Deviation for the fund's excess return (S.D.) σi=√5.722694 =2.392215 Sharpe Index (Si) = (Ri - Rf)/Si = (1.063454-5)/ 2.392215 =-1.64557 Treynor's Index (Ti) = (Ri - Rf)/Bi. =(1.063454-5)/ 1.0096114 =-3.89907 Jenson alpha (αp)= Ri –[ Rf + Bi (Rm - Rf) ] = 1.063454 - [ 5+1.0096114 (1.031112-5)] =0.070488 Expected return E(Ri) = Rf + Bi (Rm - Rf) =[ 5+1.0096114 (1.031112-5)] =0.992965 Fema Measures Selectivity =Ri –[ Rf + Bi (Rm - Rf) ] = 1.063454 - [ 5+1.0096114 (1.031112-5)] =0.070488 Diversification =[Rf + (Rm - Rf)(αi/ αm)]-[Rf + Bi (Rm - Rf) ] =[5+(1.031112-5)(2.392215/11.13139)]- [ 5+1.0096114 (1.031112-5)] =3.154092 Net selectivity= selectivity- diversification =0.070488-3.15409 =-3.0836 HDFC CAPITAL BUILDER FUND Investment Objective The Investment Objective of the Scheme is to achieve capital appreciation in the long term. Basic Scheme Information Nature of Scheme Open Ended Growth Scheme Inception Date February 01, 1994 Option/Plan Dividend Option,Growth Option. The Dividend Option offers Dividend Payout and Reinvestment Facility. Entry Load NIL (purchase / additional (With effect from August 1, 2009) purchase / switch-in) Exit Load • In respect of each purchase / switch-in of Units less (as a % of the Applicable than Rs. 5 crore in value, an Exit Load of 1.00% is NAV) payable if Units are (Other than Systematic redeemed/switched-out within 1 year from the date of Investment Plan (SIP)/ allotment. Systematic Transfer Plan (STP)) • In respect of each purchase / switch-in of Units equal to or greater than Rs. 5 crore in value, no Exit Load is payable. No Exit Load shall be levied on bonus units and units allotted on dividend reinvestment. Minimum Application For new investors :Rs.5000 and any amount thereafter. Amount For existing investors : Rs. 1000 and any amount thereafter. (Other than Systematic Investment Plan (SIP)/ Systematic Transfer Plan (STP)) Lock-In-Period Nil Net Asset Value Periodicity Every Business Day. Redemption Proceeds Normally despatched within 3 business Days Current Expense Ratio (#) On the first 100 crores average weekly net assets 2.50% (Effective Date 22nd May On the next 300 crores average weekly net assets 2.25% 2009) On the next 300 crores average weekly net assets 2.00% On the balance of the assets 1.75% Pattern The asset allocation under the Scheme will be as follows : Sr.No. Asset Type (% of Portfolio) 1 Equities and Equity Related Instruments Upto 100% 2 Debt & Money Market Instruments Risk Profile Medium to High Not more than 20% Low to Medium Investment in Securitised debt, if undertaken, would not exceed 20% of the net assets of the scheme. Investment Strategy This Scheme aims to achieve its objectives by investing in strong companies at prices which are below fair value in the opinion of the fund managers. The Scheme defines a "strong company" as one that has the following characteristics : • strong management, characterized by competence and integrity • strong position in its business (preferably market leadership) • efficiency of operations, as evidenced by profit margins and asset turnover, compared to its peers in the industry • working capital efficiency • consistent surplus cash generation • high profitability indicators (returns on funds employed) In common parlance, such companies are also called 'Blue Chips'. The Scheme defines "reasonable prices" as : • a market price quote that is around 30% lower than its value, as determined by the discounted value of its estimated future cash flows • a P/E multiple that is lower than the company's sustainable Return on funds employed • a P/E to growth ratio that is lower than those of the company's competitors • in case of companies in cyclical businesses, a market price quote that is around 50% lower than its estimated replacement cost Fund Manager Mr. Chirag Setalvad (since Apr 2, 07) Mr. Anand Laddha - Dedicated Fund Manager - Foreign Securities HDFC CAPITAL BUILDER FUND Table:3.5 NAV S&P CNX 500 Ri Rm Ri Rm Rm-Rm av sqr(RmRm av) Rm2 2007 JAN 64.459 4899.39 FEB 61.259 4504.73 -4.9644 -8.05529 39.98964 -9.0864 82.5626 8 64.88 767 MAR 60.3 4605.89 -1.56548 2.24564 -3.51551 1.214527 1.47507 7 5.042 897 APL 65.818 4934.46 9.150912 7.133692 65.27979 6.10258 37.2414 8 50.88 956 MAY 69.818 5185.95 6.077365 5.096606 30.97394 4.065494 16.5282 4 25.97 54 JUN 73.27 5223.82 4.944284 0.730242 3.610525 -0.30087 0.09052 3 0.533 254 JULY 76.914 5483.25 4.973386 4.966289 24.69927 3.935177 15.4856 2 24.66 403 AUG 76.323 5411.29 -0.76839 -1.31236 1.008405 -2.34347 5.49186 3 1.722 29 SEP 83.09 6094.11 8.866266 12.61843 111.8784 11.58732 134.266 159.2 248 OCT 96.061 7163.3 15.61078 17.54465 273.8857 16.51353 272.696 8 307.8 146 NOV 99.034 6997.6 3.094908 -2.31318 -7.15908 -3.34429 11.1842 9 5.350 8 DEC 106.53 8 7461.48 7.577196 6.62913 50.23022 5.598018 31.3378 43.94 536 2008 JAN 88.367 6245.45 -17.0559 -16.2974 277.9672 -17.3285 300.278 6 265.6 065 FEB 87.439 6356.92 -1.05017 1.784819 -1.87436 0.753707 0.56807 5 3.185 58 MAR 75.967 5762.88 -13.12 -9.34478 122.6035 -10.3759 107.659 1 87.32 486 APL 79.418 6289.07 4.542762 9.130678 41.4785 8.099566 65.6029 6 83.36 928 MAY 75.065 5937.81 -5.48113 -5.58525 30.61343 -6.61636 43.7761 9 31.19 497 JUN 64.169 4929.98 -14.5154 -16.9731 246.3716 -18.0042 324.151 4 288.0 859 JULY 67.228 5297.47 4.767099 7.454188 35.53486 6.423076 41.2559 1 55.56 493 AUG 70.149 5337.28 4.344916 0.751491 3.265164 -0.27962 0.07818 8 0.564 738 SEP 63.365 4807.2 -9.67084 -9.93165 96.04744 -10.9628 120.182 2 98.63 768 OCT 47.587 3539.57 -24.9002 -26.3694 656.603 -27.4005 750.788 3 695.3 455 NOV 44.556 3379.53 -6.36939 -4.52145 28.79888 -5.55257 30.8309 8 20.44 354 DEC 48.064 3635.87 7.873238 7.585078 59.71913 6.553966 42.9544 7 57.53 341 2009 JAN 45.564 3538.57 -5.2014 -2.67611 13.91953 -3.70723 13.7435 2 7.161 582 FEB 43.34 3403.33 -4.88105 -3.82188 18.65479 -4.85299 23.5515 6 14.60 679 MAR 46.604 3720.51 7.531149 9.319696 70.18802 8.288584 68.7006 2 86.85 673 APL 53.006 4278.54 13.73702 14.99875 206.0381 13.96764 195.094 9 224.9 625 MAY 67.6 5480.11 27.53273 28.08365 773.2195 27.05253 731.839 6 788.6 911 TOTAL 21.08029 28.87114 3270.029 0 3469.41 7 3499. 186 AVERA GE 0.752867 1.031112 116.7868 0 123.907 7 Figure:3.2 σm = √123.9077 =11.13239 β(Beta) =[N (ΣXY) – ΣXΣY ]/[ N (ΣX2) – (ΣX) 2 ] = (91560.82- 608.6119)/ (97977.21- 833.5426) = 90952.21/ 97143.67 = 0.936265 Table:3.6 Ri Rm Ri-Rm Dev frm ave sq of Dev frm av FEB -4.9644 -8.05529 3.090893 -3.36914 11.35109 MAR -1.56548 2.24564 -3.81112 3.532879 12.48124 APL 9.150912 7.13369 2 2.01722 -2.29546 5.269159 MAY 6.077365 5.09660 6 0.980759 -1.259 1.585089 JUN 4.944284 0.73024 2 4.214041 -4.49229 20.18063 JULY 4.973386 4.96628 9 0.007097 -0.28534 0.08142 AUG -0.76839 -1.31236 0.54397 -0.82221 0.676037 SEP 8.866266 12.6184 3 -3.75217 3.473923 12.06814 OCT 15.61078 17.5446 5 -1.93386 1.655617 2.741069 NOV 3.094908 -2.31318 5.408088 -5.68633 32.33438 DEC 7.577196 6.62913 0.948066 -1.22631 1.503837 2008 JAN -17.0559 -16.2974 -0.75845 0.480204 0.230596 FEB -1.05017 1.78481 9 -2.83499 2.55674 6.536922 MAR -13.12 -9.34478 -3.77523 3.496982 12.22888 APL 4.542762 9.13067 8 -4.58792 4.309671 18.57326 MAY -5.48113 -5.58525 0.10412 -0.38237 0.146203 JUN -14.5154 -16.9731 2.457673 -2.73592 7.485245 JULY 4.767099 7.45418 8 -2.68709 2.408844 5.802531 AUG 4.344916 0.75149 1 3.593425 -3.87167 14.98983 SEP -9.67084 -9.93165 0.260807 -0.53905 0.290577 OCT -24.9002 -26.3694 1.469223 -1.74747 3.053642 2007 JAN NOV -6.36939 -4.52145 -1.84793 1.569689 2.463923 DEC 7.873238 7.58507 8 0.28816 -0.5664 0.320814 2009 JAN -5.2014 -2.67611 -2.52528 2.24704 5.049189 FEB -4.88105 -3.82188 -1.05916 0.780919 0.609834 MAR 7.531149 9.31969 6 -1.78855 1.510302 2.281012 APL 13.73702 14.9987 5 -1.26173 0.983487 0.967247 MAY 27.53273 28.0836 5 -0.55091 0.272669 0.074348 TOTAL 21.08029 28.8711 4 -7.79085 181.3761 0.75286 7 1.03111 2 -0.27824 6.477719 AVERAGE Standard Deviation for the fund's excess return (S.D.) σi=√6.477719 =2.545136 Sharpe Index (Si) = (Ri - Rf)/Si = (0.752867-5)/ 2.545136 =-1.66872 Treynor's Index (Ti) = (Ri - Rf)/Bi. =(0.752867-5/ 0.936265 =-4.53625 Jenson alpha (αp)= Ri –[ Rf + Bi (Rm - Rf) ] =0.752867- [5+0.936265(1.031112-5)] = -0.39357 Expected return E(Ri) = Rf + Bi (Rm - Rf) =[5+0.936265(1.031112-5)] =1.284069 Fema Measures Selectivity =Ri –[ Rf + Bi (Rm - Rf) ] =0.752867- [5+0.936265(1.031112-5)] = -0.39357 Diversification =[Rf + (Rm - Rf)(αi/ αm)]-[Rf + Bi (Rm - Rf) ] =[5+(1.031112-5)( 2.545136/11.13139)]- [5+0.936265(1.031112-5)] =2.808464 Net selectivity= selectivity- diversification =-0.39357-2.808464 =-3.33967 HDFC GROWTH FUND Investment objective The primary investment objective of the Scheme is to generate long term capital appreciation from a portfolio that is invested predominantly in equity and equity related instruments. Basic Scheme Information Table:3.7 Nature of Scheme Open Ended Growth Scheme Inception Date Sep 11, 2000 Option/Plan Dividend Option, Growth Option, Entry Load NIL (purchase / additional purchase / switch- (With effect from August 1, 2009) in) Exit Load. Nil (as a % of the Applicable NAV) Minimum Application Amount Rs.5000 and in multiples of Rs.100 thereof to open an account / folio. Additional purchases is Rs. 1000 and in multiples of Rs. 100 thereof Lock-In-Period Nil Net Asset Value Periodicity Every Business Day Redemption Proceeds Normally despatched within 3 Business days Investment pattern The corpus of the Scheme will be invested primarily in equity and equity related instruments. The Scheme may invest a part of its corpus in debt and money market instruments, in order to manage its liquidity requirements from time to time, and under certain circumstances, to protect the interests of the Unit holders. The asset allocation under the Scheme will be as follows : Table:3.8 SR TYPE OF INSTRUMENTS NO. NORMAL ALLOCATION (%of net asset) 1 Equities & Equities related 80-100 instruments 2 Debt securities, money market instruments & cash RISK PROFILE Medium to high 0-100 Low to medium Investment Strategy & Risk Control The investment approach will be based on a set of well established but flexible principles that emphasise the concept of sustainable economic earnings and cash return on investment as the means of valuation of companies. In summary, the Investment Strategy is expected to be a function of extensive research and based on data and reasoning, rather than current fashion and emotion. The objective will be to identify "businesses with superior growth prospects and good management, at a reasonable price". Benchmark Index : SENSEX Fund Manager : Mr. Shrinivas Rao HDFC GROWTH FUND Table:3.9 NAV SENSEX Ri Rm Ri Rm Rm-Rm av sqr(RmRm av) Rm2 2007 JAN 48.917 14090.92 FEB 45.047 12938.09 -7.91136 -8.18137 64.72575 -8.91997 79.56584 66.93478 MAR 45.461 13072.1 0.91904 1.035779 0.951922 0.297178 0.088315 1.072838 APL 48.581 13872.37 6.863025 6.12197 42.01523 5.383369 28.98066 37.47851 MAY 53.198 14544.46 9.503715 4.84481 46.0437 4.106209 16.86095 23.47219 JUN 54.695 14650.51 2.814016 0.729144 2.051821 -0.00946 8.94E-05 0.53165 JULY 58.716 15550.99 7.351677 6.146407 45.1864 5.407806 29.24437 37.77832 AUG 58.17 15318.6 -0.9299 -1.49437 1.389618 -2.23298 4.986179 2.233155 SEP 63.82 17291.1 9.71291 12.8765 125.0683 12.1379 147.3287 165.8043 OCT 73.682 19837.99 15.45284 14.72949 227.6123 13.99088 195.7448 216.9577 NOV 74.895 19363.19 1.646264 -2.39339 -3.94015 -3.13199 9.809352 5.728304 DEC 80.576 20286.99 7.585286 4.770908 36.1887 4.032307 16.2595 22.76156 2008 JAN 68.432 17648.71 -15.0715 -13.0048 196.0015 -13.7434 188.8807 169.1245 FEB 67.827 17578.72 -0.88409 -0.39657 0.350606 -1.13517 1.28862 0.15727 MAR 62.15 15644.44 -8.36982 -11.0035 92.09761 -11.7421 137.8777 121.0777 APL 66.196 17287.31 6.510056 10.5013 68.36407 9.762702 95.31035 110.2774 MAY 62.813 16415.57 -5.11058 -5.04266 25.77091 -5.78126 33.42296 25.4284 JUN 53.472 13461.6 -14.8711 -17.9949 267.6048 -18.7335 350.9451 323.8174 JULY 56.819 14355.75 6.259351 6.642227 41.57603 5.903626 34.8528 44.11918 AUG 58.871 14564.53 3.611468 1.45433 5.252267 0.715729 0.512268 2.115076 SEP 54.54 12860.43 -7.35676 -11.7003 86.07665 -12.4389 154.7273 136.898 OCT 42.283 9788.06 -22.4734 -23.8901 536.8922 -24.6287 606.5731 570.737 NOV 40.089 9092.72 -5.18885 -7.10396 36.86137 -7.84256 61.50578 50.46627 DEC 41.652 9647.31 3.898825 6.099275 23.78001 5.360674 28.73683 37.20116 2009 JAN 38.443 9424.24 -7.70431 -2.31225 17.8143 -3.05085 9.307696 5.346504 FEB 36.429 8891.61 -5.23893 -5.6517 29.60885 -6.3903 40.83598 31.94174 MAR 38.73 9708.5 6.316396 9.1872 58.03 8.448599 71.37883 84.40465 APL 44.131 11403.25 13.94526 17.45635 243.4334 16.71775 279.4832 304.7242 MAY 56.982 14625.25 29.12012 28.2551 822.792 27.5165 757.1579 798.3508 TOTAL 30.39962 20.68083 3139.6 0 3381.666 3396.941 AVG 1.085701 0.738601 112.1286 0 120.7738 Figure:3.3 σm= √120.7738 =10.98971 β(Beta) =[N (ΣXY) – ΣXΣY ]/[ N (ΣX2) – (ΣX) 2 ] = (87908.8-628.6893)/ (95114.34-427.6966) = 87280.12/ 94686.64 = 0.921779 Table:3.10 Ri Rm Ri-Rm Dev frm ave sq of Dev frm av Rm2 FEB -7.91136 -8.18137 0.270008 0.077092104 0.005943 66.93478 MAR 0.91904 1.035779 -0.11674 0.463838642 0.215146 1.072838 APL 6.863025 6.12197 0.741056 -0.393955855 0.155201 37.47851 MAY 9.503715 4.84481 4.658905 -4.311805316 18.59167 23.47219 JUN 2.814016 0.729144 2.084872 -1.737772055 3.019852 0.53165 JULY 7.351677 6.146407 1.20527 -0.85817039 0.736456 37.77832 AUG -0.9299 -1.49437 0.564474 -0.217374552 0.047252 2.233155 SEP 9.71291 12.8765 -3.16359 3.510692544 12.32496 165.8043 OCT 15.45284 14.72949 0.723351 -0.376251086 0.141565 216.9577 NOV 1.646264 -2.39339 4.039651 -3.692551406 13.63494 5.728304 DEC 7.585286 4.770908 2.814378 -2.467278063 6.087461 22.76156 2008 JAN -15.0715 -13.0048 -2.0667 2.413797413 5.826418 169.1245 FEB -0.88409 -0.39657 -0.48752 0.834616326 0.696584 0.15727 MAR -8.36982 -11.0035 2.633708 -2.286608411 5.228578 121.0777 APL 6.510056 10.5013 -3.99125 4.338346289 18.82125 110.2774 MAY -5.11058 -5.04266 -0.06792 0.415022146 0.172243 25.4284 JUN -14.8711 -17.9949 3.123803 -2.776702677 7.710078 323.8174 JULY 6.259351 6.642227 -0.38288 0.729975995 0.532865 44.11918 AUG 3.611468 1.45433 2.157138 -1.810037944 3.276237 2.115076 SEP -7.35676 -11.7003 4.34358 -3.996480234 15.97185 136.898 2007 JAN OCT -22.4734 -23.8901 1.416689 -1.069589295 1.144021 570.737 NOV -5.18885 -7.10396 1.915115 -1.568014871 2.458671 50.46627 DEC 3.898825 6.099275 -2.20045 2.547549815 6.49001 37.20116 2009 JAN -7.70431 -2.31225 -5.39206 5.73916105 32.93797 5.346504 FEB -5.23893 -5.6517 0.412777 -0.065677352 0.004314 31.94174 MAR 6.316396 9.1872 -2.8708 3.217903695 10.3549 84.40465 APL 13.94526 17.45635 -3.51109 3.858190515 14.88563 304.7242 MAY 29.12012 28.2551 0.865017 -0.517917027 0.268238 798.3508 TOTAL 30.39962 20.68083 9.718797 -4.44089E-15 181.7403 3396.941 AVG 1.085701 0.738601 0.3471 -1.58603E-16 6.490725 Standard Deviation for the fund's excess return (S.D.) σi=√6.490725 =2.54769 Sharpe Index (Si) = (Ri - Rf)/Si = (1.085701-5)/ 2.54769 =-1.53641 Treynor's Index (Ti) = (Ri - Rf)/Bi. =(1.085701-5)/ 0.921779 =-4.24646 Jenson alpha (αp)= Ri –[ Rf + Bi (Rm - Rf) ] =1.085701- [5+0.921779 (0.738601-5)] = 0.013767 Expected return E(Ri) = Rf + Bi (Rm - Rf) =[5+0.921779 (0.738601-5)] =1.071934 Fema Measures Selectivity =Ri –[ Rf + Bi (Rm - Rf) ] =1.085701- [5+0.921779 (0.738601-5)] = 0.013767 Diversification =[Rf + (Rm - Rf)(αi/ αm)]-[Rf + Bi (Rm - Rf)] =[5+(0.738601-5)( 2.54769/10.98971)]- [5+0.921779 (0.738601-5)] =2.940167 Net selectivity= selectivity- diversification =0.013767-2.940167 =-2.9264 HDFC LONG TERM FUND Investment Objective To achieve long term capital appreciation. Basic Scheme Information Nature of Scheme Close Ended Equity Scheme with a maturity period of 5 years with automatic conversion into an open-ended scheme upon maturity of the Scheme. Inception Date 10-Feb-06 Closing Date 27-Jan-06 Option/Plan Dividend Option,Growth Option. Dividend Option currently offers payout facility only. Entry Load NIL (purchase / additional (With effect from August 1, 2009) purchase / switch-in) Exit Load (as a % of the Applicable NAV) (Other than Systematic Investment Plan (SIP)/ Systematic Transfer Plan (STP)) Redemption / Switch-out from the Date of Allotment : • Upto 12 months 4% • After 12 months upto 24 months 3% • After 24 months upto 36 months 2% • After 36 months upto 48 months 1% • After 48 months upto 54 months 0.5% • After 54 months upto Maturity Nil No Exit Load shall be levied on bonus units and units allotted on dividend reinvestment. Specified Redemption Period A Unit holder can submit redemption/ switch-out request only during the Specified Redemption Period. Presently, the Specified Redemption Period is the first five Business Days immediately after the end of each calendar half year. Minimum Application Currently no purchases/ switch-ins are allowed into this Amount scheme. (Other than Systematic Investment Plan (SIP)/ Systematic Transfer Plan (STP)) Lock-In-Period Nil Net Asset Value Periodicity Every Business Day. Redemption Proceeds Normally dispatched within 3 Days Current Expense Ratio (#) On the first 100 crores average weekly net assets 2.50% (Effective Date 22nd May On the next 300 crores average weekly net assets 2.25% 2009) On the next 300 crores average weekly net assets 2.00% On the balance of the assets 1.75% Investment Pattern The following table provides the asset allocation of the Schemes portfolio. Type of Instruments Minimum Allocation Minimum Allocation Risk Profile of the Instrument Equity & Equity related (% of Net Assets) (% of Net Assets) 70 100 High 0 30 Low instruments Fixed Income Securities (including money market instruments) Investment Strategy The investment strategy of the Scheme is to build and maintain a diversified portfolio of equity stocks that have the potential to appreciate in the long run. Companies identified for selection in the portfolio will have demonstrated a potential ability to grow at a reasonable rate for the long term. The aim will be to build a portfolio that adequately reflects a cross-section of the growth areas of the economy from time to time. While the portfolio focuses primarily on a buy and hold strategy at most times, it will balance the same with a rational approach to selling when the valuations become too demanding even in the face of reasonable growth prospects in the long run. Fund Manager Mr. Srinivas Rao Ravuri (since Apr 3, 06) Mr. Anand Laddha - Dedicated Fund Manager - Foreign Securities HDFC LONG TERM FUND Table:3.11 NAV SENSEX Ri Rm Ri Rm Rm-Rm av sqr(RmRm av) Rm2 2007 JAN 95.224 14090.92 FEB 87.782 12938.09 -7.81526 -8.18137 63.93949 -8.91997 79.56584 66.93478 MAR 86.337 13072.1 -1.64612 1.035779 -1.70502 0.297178 0.088315 1.072838 APL 91.627 13872.37 6.127153 6.12197 37.51024 5.383369 28.98066 37.47851 MAY 96.561 14544.46 5.384876 4.84481 26.0887 4.106209 16.86095 23.47219 JUN 100.695 14650.51 4.281232 0.729144 3.121633 -0.00946 8.94E-05 0.53165 JULY 102.976 15550.99 2.265256 6.146407 13.92319 5.407806 29.24437 37.77832 AUG 102.627 15318.6 -0.33891 -1.49437 0.506464 -2.23298 4.986179 2.233155 SEP 109.68 17291.1 6.87246 12.8765 88.49326 12.1379 147.3287 165.8043 OCT 118.185 19837.99 7.754376 14.72949 114.218 13.99088 195.7448 216.9577 NOV 119.445 19363.19 1.066125 -2.39339 -2.55165 -3.13199 9.809352 5.728304 DEC 128.983 20286.99 7.985265 4.770908 38.09697 4.032307 16.2595 22.76156 2008 JAN 112.202 17648.71 -13.0102 -13.0048 169.1954 -13.7434 188.8807 169.1245 FEB 110.554 17578.72 -1.46878 -0.39657 0.582478 -1.13517 1.28862 0.15727 MAR 96.105 15644.44 -13.0696 -11.0035 143.8121 -11.7421 137.8777 121.0777 APL 103.44 17287.31 7.632277 10.5013 80.14885 9.762702 95.31035 110.2774 MAY 99.18 16415.57 -4.11833 -5.04266 20.76733 -5.78126 33.42296 25.4284 JUN 85.045 13461.6 -14.2519 -17.9949 256.4613 -18.7335 350.9451 323.8174 JULY 88.972 14355.75 4.617555 6.642227 30.67085 5.903626 34.8528 44.11918 AUG 93.359 14564.53 4.930765 1.45433 7.17096 0.715729 0.512268 2.115076 SEP 82.286 12860.43 -11.8607 -11.7003 138.7739 -12.4389 154.7273 136.898 OCT 63.504 9788.06 -22.8253 -23.8901 545.298 -24.6287 606.5731 570.737 NOV 57.237 9092.72 -9.86867 -7.10396 70.10665 -7.84256 61.50578 50.46627 DEC 61.406 9647.31 7.28375 6.099275 44.42559 5.360674 28.73683 37.20116 2009 JAN 58.709 9424.24 -4.39208 -2.31225 10.15559 -3.05085 9.307696 5.346504 FEB 55.785 8891.61 -4.9805 -5.6517 28.14829 -6.3903 40.83598 31.94174 MAR 59.209 9708.5 6.137851 9.1872 56.38966 8.448599 71.37883 84.40465 APL 68.298 11403.25 15.35071 17.45635 267.9674 16.71775 279.4832 304.7242 MAY 87.958 14625.25 28.78562 28.2551 813.3405 27.5165 757.1579 798.3508 TOTAL 6.828943 20.68083 3065.056 0 3381.666 3396.941 AVG 0.243891 0.738601 109.4663 0 120.7738 Figure:3.4 σm= √120.7738 =10.98971 β(Beta) =[N (ΣXY) – ΣXΣY ]/[ N (ΣX2) – (ΣX) 2 ] = (85821.57- 141.2282)/ (95114.34- 427.6966) = 85680.34/ 94686.64 = 0.904883 Table:3.12 Ri Rm Ri-Rm Dev frm ave sq of Dev frm av FEB -7.81526 -8.18137 0.366111 -0.860821325 0.741013 MAR -1.64612 1.035779 -2.6819 2.187192079 4.783809 APL 6.127153 6.12197 0.005183 -0.499893333 0.249893 MAY 5.384876 4.84481 0.540065 -1.034775537 1.07076 JUN 4.281232 0.729144 3.552088 -4.046798071 16.37657 JULY 2.265256 6.146407 -3.88115 3.386440599 11.46798 AUG -0.33891 -1.49437 1.15546 -1.650170515 2.723063 SEP 6.87246 12.8765 -6.00404 5.509332488 30.35274 OCT 7.754376 14.72949 -6.97511 6.48039862 41.99557 NOV 1.066125 -2.39339 3.459513 -3.954222903 15.63588 DEC 7.985265 4.770908 3.214357 -3.709067209 13.75718 2008 JAN -13.0102 -13.0048 -0.00545 -0.489256261 0.239372 FEB -1.46878 -0.39657 -1.07221 0.577496505 0.333502 MAR -13.0696 -11.0035 -2.0661 1.571389464 2.469265 APL 7.632277 10.5013 -2.86903 2.374315379 5.637374 MAY -4.11833 -5.04266 0.924329 -1.419039116 2.013672 JUN -14.2519 -17.9949 3.743063 -4.237772814 17.95872 JULY 4.617555 6.642227 -2.02467 1.529961243 2.340781 AUG 4.930765 1.45433 3.476435 -3.971144712 15.76999 SEP -11.8607 -11.7003 -0.16032 -0.334386466 0.111814 OCT -22.8253 -23.8901 1.064835 -1.559545364 2.432182 NOV -9.86867 -7.10396 -2.76471 2.26999821 5.152892 DEC 7.28375 6.099275 1.184475 -1.679185121 2.819663 2009 JAN -4.39208 -2.31225 -2.07983 1.585118054 2.512599 FEB -4.9805 -5.6517 0.671205 -1.165915514 1.359359 MAR 6.137851 9.1872 -3.04935 2.554639268 6.526182 2007 JAN APL 15.35071 17.45635 -2.10565 1.610935739 2.595114 MAY 28.78562 28.2551 0.530513 -1.025223388 1.051083 TOTAL 6.828943 20.68083 -13.8519 -4.44089E-15 210.478 AVG 0.243891 0.738601 -0.49471 -1.58603E-16 5.538895 Standard Deviation for the fund's excess return (S.D.) σi=√5.538895 =2.353486 Sharpe Index (Si) = (Ri - Rf)/Si = (0.243891-5)/ 2.353486 =-2.02088 Treynor's Index (Ti) = (Ri - Rf)/Bi. =(0.243891-5)/ 0.904883 =-5.25605 Jenson alpha (αp)= Ri –[ Rf + Bi (Rm - Rf) ] =0.243891- [5+0.904883 (0.738601-5)] = -0.90004 Expected return E(Ri) = Rf + Bi (Rm - Rf) =[5+0.904883 (0.738601-5)] =1.143932 Fema Measures Selectivity =Ri –[ Rf + Bi (Rm - Rf) ] =0.243891- [5+0.904883 (0.738601-5)] = -0.90004 Diversification =[Rf + (Rm - Rf)(αi/ αm)]-[Rf + Bi (Rm - Rf)] =[5+(0.738601-5)( 2.353486/10.98971)]- [5+0.904883 (0.738601-5)] =2.943474 Net selectivity= selectivity- diversification =-0.90004-2.943474 =-3.84352 HDFC TAXSAVER Investment Objective The investment objective of the Scheme is to achieve long term growth of capital. Basic Scheme Information Table:3.13 Nature of Scheme Open Ended Equity Linked Saving Scheme Inception Date Mar 31, 1996 Option/Plan Dividend Option, Growth Option, Entry Load NIL (purchase / additional purchase / switch- (With effect from August 1, 2009) in) Exit Load. Nil (as a % of the Applicable NAV) Minimum Application Amount Rs.5000 and in multiples of Rs.100 thereof to open an account / folio. Lock-In-Period 3 yrs Net Asset Value Periodicity Every Business Day Redemption Proceeds Normally despatched within 3 Business days Investment Pattern The asset allocation under the Scheme will be as follows: Table:3.14 SR NO. ASSET TYPE (% OF PORTFOLIO) 1 Equities & Equities RISK PROFILE Minimum 80% Medium to high Minimum 20% Low to medium related instruments 2 Debt securities, money market instruments & cash Investment in Securitized debt, if undertaken, would not exceed 20% of the net assets of the scheme. The Scheme may also invest up to 25% of net assets of the Scheme in derivatives such as Futures & Options and such other derivative instruments as may be introduced from time to time for the purpose of hedging and portfolio balancing and and other uses as may be permitted under the regulations and guidelines. The Scheme may also invest a part of its corpus, not exceeding 40% of its net assets, in overseas markets in Global Depository Receipts (GDRs), ADRs, overseas equity, bonds and mutual funds and such other instruments as may be allowed under the Regulations from time to time. The ELSS (Equity Linked Savings Scheme) guidelines, as applicable, would be adhered to in the management of this Fund. If the investment in equities and related instruments falls below 80% of the portfolio of the Scheme at any point in time, it would be endeavoured to review and rebalance the composition. Benchmark Index : S&P CNX 500. HDFC Tax saver, which is benchmarked to S&P CNX 500 Index is not sponsored, endorsed, sold or promoted by Indian Index Service & Products Limited (IISL). Fund Manager : Dhawal Mehta HDFC TAX SAVER FUND Table:3.15 NAV S&P CNX 500 Ri Rm Ri Rm Rm-Rm av sqr(RmRm av) Rm2 2007 JAN 146.134 4899.39 FEB 135.133 4504.73 -7.52802 -8.05529 60.64039 -9.0864 82.56268 64.88767 MAR 133.882 4605.89 -0.92575 2.24564 -2.07891 1.214527 1.475077 5.042897 APL 144.308 4934.46 7.787455 7.133692 55.5533 6.10258 37.24148 50.88956 MAY 153.765 5185.95 6.553344 5.096606 33.39982 4.065494 16.52824 25.9754 JUN 156.535 5223.82 1.80145 0.730242 1.315495 -0.30087 0.090523 0.533254 JULY 163.61 5483.25 4.519756 4.966289 22.44641 3.935177 15.48562 24.66403 AUG 161.481 5411.29 -1.30127 -1.31236 1.707729 -2.34347 5.491863 1.72229 SEP 173.27 6094.11 7.300549 12.61843 92.12149 11.58732 134.266 159.2248 OCT 198.737 7163.3 14.69787 17.54465 257.8689 16.51353 272.6968 307.8146 NOV 196.735 6997.6 -1.00736 -2.31318 2.330208 -3.34429 11.18429 5.3508 DEC 204.284 7461.48 3.837141 6.62913 25.43691 5.598018 31.3378 43.94536 2008 JAN 173.277 6245.45 -15.1784 -16.2974 247.3687 -17.3285 300.2786 FEB 171.845 6356.92 -0.82642 1.784819 -1.47501 0.753707 0.568075 3.18558 MAR 152.02 5762.88 -11.5366 -9.34478 107.8066 -10.3759 107.6591 87.32486 APL 158.411 6289.07 4.204052 9.130678 38.38584 8.099566 65.60296 83.36928 265.6065 MAY 148.793 5937.81 -6.07155 -5.58525 33.91109 -6.61636 43.77619 31.19497 JUN 126.45 4929.98 -15.0162 -16.9731 254.8707 -18.0042 324.1514 288.0859 JULY 135.953 5297.47 7.515223 7.454188 56.01989 6.423076 41.25591 55.56493 AUG 142.358 5337.28 4.711187 0.751491 3.540414 -0.27962 0.078188 0.564738 SEP 132.682 4807.2 -6.79695 -9.93165 67.50492 -10.9628 120.1822 98.63768 OCT 99.119 3539.57 -25.2958 -26.3694 667.0357 -27.4005 750.7883 695.3455 NOV 90.957 3379.53 -8.23455 -4.52145 37.23212 -5.55257 30.83098 20.44354 DEC 98.972 3635.87 8.811856 7.585078 66.83862 6.553966 42.95447 57.53341 2009 JAN 93.555 3538.57 -5.47327 -2.67611 14.64708 -3.70723 13.74352 FEB 89.449 3403.33 -4.38886 -3.82188 16.77372 -4.85299 23.55156 14.60679 MAR 97.063 3720.51 8.512113 9.319696 79.3303 8.288584 68.70062 86.85673 APL 112.05 4278.54 15.44049 14.99875 231.588 13.96764 195.0949 224.9625 MAY 144.827 5480.11 29.25212 28.08365 821.5062 27.05253 731.8396 788.6911 TOTAL 15.36369 28.87114 3293.627 0 3469.417 3499.186 AVG 0.548703 1.031112 117.6295 7.161582 123.9077 Figure:3.5 σm= √123.9077 =11.13139 β(Beta) =[N (ΣXY) – ΣXΣY ]/[ N (ΣX2) – (ΣX) 2 ] = (92221.54- 443.5671)/ (97977.21- 833.5426) = 91777.98/ 97143.67 = 0.944765 Table:3.16 Ri Rm Ri-Rm Dev frm ave sq of Dev frm av FEB -7.52802 -8.05529 0.527266 -1.00968 1.019444 MAR -0.92575 2.24564 -3.17139 2.688985 7.230641 APL 7.787455 7.133692 0.653763 -1.13617 1.290886 MAY 6.553344 5.096606 1.456738 -1.93915 3.760291 JUN 1.80145 0.730242 1.071208 -1.55362 2.413726 JULY 4.519756 4.966289 -0.44653 -0.03588 0.001287 AUG -1.30127 -1.31236 0.011095 -0.4935 0.243546 SEP 7.300549 12.61843 -5.31788 4.835475 23.38182 OCT 14.69787 17.54465 -2.84678 2.364366 5.590227 NOV -1.00736 -2.31318 1.305818 -1.78823 3.197757 DEC 3.837141 6.62913 -2.79199 2.30958 5.334158 2008 JAN -15.1784 -16.2974 1.119058 -1.60147 2.564696 FEB -0.82642 1.784819 -2.61124 2.128833 4.531929 MAR -11.5366 -9.34478 -2.19178 1.709373 2.921956 APL 4.204052 9.130678 -4.92663 4.444217 19.75106 2007 JAN MAY -6.07155 -5.58525 -0.4863 0.003894 1.52E-05 JUN -15.0162 -16.9731 1.956929 -2.43934 5.950372 JULY 7.515223 7.454188 0.061035 -0.54344 0.295331 AUG 4.711187 0.751491 3.959696 -4.44211 19.7323 SEP -6.79695 -9.93165 3.134702 -3.61711 13.08349 OCT -25.2958 -26.3694 1.073584 -1.55599 2.421115 NOV -8.23455 -4.52145 -3.71309 3.230684 10.43732 DEC 8.811856 7.585078 1.226778 -1.70919 2.921319 2009 JAN -5.47327 -2.67611 -2.79715 2.314743 5.358035 FEB -4.38886 -3.82188 -0.56698 0.08457 0.007152 MAR 8.512113 9.319696 -0.80758 0.325174 0.105738 APL 15.44049 14.99875 0.441737 -0.92415 0.854046 MAY 29.25212 28.08365 1.168474 -1.65088 2.725415 TOTAL 15.36369 28.87114 -13.5075 147.1251 AVG 0.548703 1.031112 -0.48241 5.254467 Standard Deviation for the fund's excess return (S.D.) σi=√ 5.254467 = 2.292262 Sharpe Index (Si) = (Ri - Rf)/Si = (0.548703-5)/ 2.292262 =-1.94188 Treynor's Index (Ti) = (Ri - Rf)/Bi. =(0.548703-5)/ 0.944765 =-4.71154 Jenson alpha (αp) = Ri –[ Rf + Bi (Rm - Rf) ] =0.548703- [5+0.944765 (1.031112-5)] = -0.70163 Expected return E(Ri) = Rf + Bi (Rm - Rf) =[5+0.944765 (1.031112-5)] =1.250332 Fema Measure: Selectivity =Ri –[ Rf + Bi (Rm - Rf) ] =0.548703- [5+0.944765 (1.031112-5)] = -0.70163 Diversification = [Rf + (Rm - Rf)(αi/ αm)]-[Rf + Bi (Rm - Rf)] =[5+(1.031112-5)( 2.292262/11.13139)]- [5+0.944765 (1.031112-5)] =2.932363 Net selectivity= selectivity- diversification =-0.70163-2.932363 =-3.63399 HDFC TOP 200 FUND Investment Objective The investment objective is to generate long-term capital appreciation from a portfolio of equity and equity linked instruments. The investment portfolio for equity and equity-linked instruments will be primarily drawn from the companies in the BSE 200 Index. Further, the Scheme may also invest in listed companies that would qualify to be in the top 200 by market capitalisation on the BSE even though they may not be listed on the BSE This includes participation in large IPO's where in the market capitalisation of the company based on issue price would make the company a part of the top 200 companies listed on the BSE based on market capitalisation. Basic Scheme Information Table:3.17 Nature of Scheme Open Ended Equity Growth Scheme Inception Date Oct 11, 1996 Option/Plan Dividend Option, Growth Option, Entry Load NIL (purchase / additional purchase / switch- (With effect from August 1, 2009) in) Exit Load. Nil Minimum Application Amount Rs.5000 and in multiples of Rs.100 thereof to open an account / folio. Additional purchases is Rs. 1000 and in multiples of Rs. 100 thereof. Lock-In-Period Investment Pattern Nil The asset allocation under the Scheme will be as follows: Table:3.18 SR NO. ASSET TYPE (% OF PORTFOLIO) RISK PROFILE 1 Equities & Equities Upto 100% (including use of related instruments derivatives for hedging and other Medium to high uses as permitted by prevailing SEBI Regulations) 2 Debt securities, money Balance in Debt & Money Market market instruments & Instruments Low to medium cash Investment in Securitised debt, if undertaken, would not exceed 20% of the net assets of the scheme. The Scheme may also invest upto 25% of net assets of the Scheme in derivatives such as Futures & Options and such other derivative instruments as may be introduced from time to time for the purpose of hedging and portfolio balancing and other uses as may be permitted under the regulations and guidelines. Investment Strategy & Risk Control The investment strategy of primarily restricting the equity portfolio to the BSE 200 Index scrips is intended to reduce risks while maintaining steady growth. Stock specific risk will be minimised by investing only in those companies / industries that have been thoroughly researched by the investment manager's research team. Risk will also be reduced through a diversification of the portfolio. Benchmark Index : BSE 200 Fund Manager : Mr. Prashant Jain HDFC TOP 200 FUND Table:3.19 Ri Rm Ri Rm Rm-AvRm (RmAvRm)2 Rm2 2007 JAN 112.359 1687.35 FEB 103.269 1545.27 -8.09014 -8.4203 68.12144 -9.34081 87.25075 70.90152 MAR 104.504 1556.72 1.195906 0.740971 0.886131 -0.17954 0.032233 0.549038 APRI L 111.805 1666.14 6.986335 7.028881 49.10612 6.108374 37.31223 49.40517 MAY 119.096 1766.08 6.521175 5.998295 39.11594 5.077788 25.78393 35.97955 JUNE 120.34 1804.81 1.044536 2.192992 2.290658 1.272485 1.619219 4.809216 JULY 127.614 1894.18 6.04454 4.951768 29.93116 4.031261 16.25106 24.52 AUG 126.201 1857.7 -1.10725 -1.9259 2.132443 -2.84641 8.10203 3.709088 SEPT 140.49 2118.86 11.32241 14.05824 159.1733 13.13774 172.6001 197.6342 OCT 160.215 2439.87 14.04015 15.15013 212.71 14.22962 202.4821 229.5264 NOV 158.356 2454.23 -1.16032 0.588556 -0.68291 -0.33195 0.110192 0.346398 DEC 169.794 2656.52 7.222966 8.242504 59.53532 7.321997 53.61163 67.93887 2008 JAN 147.718 2230.39 -13.0016 -16.0409 208.5581 -16.9614 287.6897 257.3108 FEB 147.689 2217.47 -0.01963 -0.57927 0.011372 -1.49978 2.249334 0.335555 MAR 131.544 1932.41 -10.9318 -12.8552 140.5298 -13.7757 189.7699 165.2559 APRI L 143.025 2157.52 8.727878 11.64918 101.6727 10.72868 115.1045 135.7035 MAY 137.675 2038.22 -3.7406 -5.5295 20.68366 -6.45 41.60255 30.57534 JUNE 115.424 1644.18 -16.162 -19.3326 312.4523 -20.2531 410.1865 373.7477 JULY 123.902 1749.11 7.345093 6.381905 46.87568 5.461398 29.82686 40.72871 AUG 129.235 1782.08 4.304208 1.884959 8.113254 0.964452 0.930167 3.553069 SEPT 118.754 1555.7 -8.11003 -12.7031 103.0228 -13.6236 185.6036 161.3696 OCT 92.324 1145.68 -22.2561 -26.356 586.5812 -27.2765 744.0068 694.6377 NOV 86.546 1062.35 -6.25839 -7.27341 45.51987 -8.19392 67.14027 52.90249 DEC 92.798 1156.59 7.223904 8.870899 64.08253 7.950392 63.20874 78.69286 2009 JAN 88.074 1107.06 -5.09063 -4.28242 21.80018 -5.20292 27.07041 18.33909 FEB 84.379 1044.94 -4.19534 -5.61126 23.54111 -6.53177 42.66396 31.48622 MAR 92.552 1140.43 9.686059 9.138324 88.51435 8.217817 67.53251 83.50896 APRI L 107.584 1339.38 16.24168 17.44517 283.3389 16.52467 273.0646 304.3341 MAY 139.341 1772.82 29.51833 32.36124 955.2498 31.44073 988.5198 1047.25 Total 37.30138 25.7742 3632.867 0 4141.326 4165.051 Avera ge 1.332192 0.920507 129.7453 0 147.9045 Figure:3.6 σm= √147.9045 =12.1616 β(Beta) =[N (ΣXY) – ΣXΣY ]/[ N (ΣX2) – (ΣX) 2 ] = (101720.3- 961.4133)/ (116621.4- 664.3093) = 100758.9/ 115957.1 = 0.868932 Table:3.20 Ri Rm Ri-Rm dev frm av sq of dev Rm2 FEB -8.09014 -8.4203 0.330164 0.081521 0.006646 70.90152 MAR 1.195906 0.740971 0.454935 -0.04325 0.001871 0.549038 APRIL 6.986335 7.028881 -0.04255 0.454231 0.206326 49.40517 MAY 6.521175 5.998295 0.52288 -0.11119 0.012364 35.97955 JUNE 1.044536 2.192992 -1.14846 1.560142 2.434043 4.809216 JULY 6.04454 4.951768 1.092773 -0.68109 0.46388 24.52 AUG -1.10725 -1.9259 0.818654 -0.40697 0.165624 3.709088 SEPT 11.32241 14.05824 -2.73583 3.147515 9.906851 197.6342 OCT 14.04015 15.15013 -1.10998 1.521668 2.315473 229.5264 NOV -1.16032 0.588556 -1.74887 2.160557 4.668006 0.346398 DEC 7.222966 8.242504 -1.01954 1.431223 2.048399 67.93887 2008 JAN -13.0016 -16.0409 3.039273 -2.62759 6.90422 257.3108 FEB -0.01963 -0.57927 0.559639 -0.14795 0.02189 0.335555 MAR -10.9318 -12.8552 1.923436 -1.51175 2.285389 165.2559 APRIL 8.727878 11.64918 -2.92131 3.332991 11.10883 135.7035 MAY -3.7406 -5.5295 1.788892 -1.37721 1.896699 30.57534 2007 JAN JUNE -16.162 -19.3326 3.170579 -2.75889 7.611496 373.7477 JULY 7.345093 6.381905 0.963188 -0.5515 0.304156 40.72871 AUG 4.304208 1.884959 2.41925 -2.00756 4.030315 3.553069 SEPT -8.11003 -12.7031 4.593101 -4.18142 17.48424 161.3696 OCT -22.2561 -26.356 4.099889 -3.6882 13.60285 694.6377 NOV -6.25839 -7.27341 1.015015 -0.60333 0.364007 52.90249 DEC 7.223904 8.870899 -1.647 2.058681 4.238165 78.69286 2009 JAN -5.09063 -4.28242 -0.80821 1.219896 1.488145 18.33909 FEB -4.19534 -5.61126 1.415923 -1.00424 1.008493 31.48622 MAR 9.686059 9.138324 0.547736 -0.13605 0.01851 83.50896 APRIL 16.24168 17.44517 -1.20349 1.615179 2.608803 304.3341 MAY 29.51833 32.36124 -2.84291 3.254597 10.5924 1047.25 37.30138 25.7742 11.52718 107.7981 4165.051 1.332192 0.920507 0.411685 3.849932 Standard Deviation for the fund's excess return (S.D.) σi=√3.849932 =1.962124 Sharpe Index (Si) = (Ri - Rf)/Si = (1.332192-5)/ 1.962124 =-1.8693 Treynor's Index (Ti) = (Ri - Rf)/Bi. = (4.528901-5)/ 0.868932 =-4.22105 Jenson alpha (αp)= Ri –[ Rf + Bi (Rm - Rf) ] =1.332192- [5+0.868932 (0.920507-5)] = -0.12301 Expected return E(Ri) = Rf + Bi (Rm - Rf) =[5+0.868932 (0.920507-5)] =1.455198 Fema Measure: Selectivity =Ri –[ Rf + Bi (Rm - Rf) ] =1.332192- [5+0.868932 (0.920507-5)] = -0.12301 Diversification =[Rf + (Rm - Rf)(αi/ αm)]-[Rf + Bi (Rm - Rf)] =[5+(0.920507-5)( 1.962124/12.1616)]- [5+0.868932 (0.920507-5)] =2.886626 Net selectivity= selectivity- diversification =-0.12301-2.886626 =-2.87834 3.2 ANALYSIS OF THE OBSERVATION: The table given below illustrates the comparison among the analysed funds based on the different measures of comparison. Performance of Fund portfolio and Benchmark return for 29 months (jan07-may08) Table:3.21 FUND BENCHMARK RETURNS RETURN EQUITY FUND 12.22546 11.8529 Capital builder 4.872865 11.8529 Growth fund 16.48711 3.792016 Long term adv -7.63043 3.792016 Tax saver -0.89438 11.8529 Top 200 24.0141 5.065339 Figure:3.7 Performance Evaluation against Benchmarks The above table presents return and risk of the six funds along with market return and risk. From the table it is evident that, Top 200, Equity fund and Growth fund have earned greater return as against the market earning. Capital builder, Long term advantage and Tax saver funds have not earned higher return than the Market portfolio. Long-term advantage and Tax saver funds have even negative returns. Comparison of ratios: Table:3.22 Fund name S.D. market S.D. fund B value Sharpe ratio Treynor ratio Jenson's alpha Fema Retuns jan07may08(29 months) HDFC Equity 11.13239 2.392215 1.0096114 -1.64557 -3.89907 0.070488 -3.0836 12.22546 HDFC Capital Builder 11.13239 2.545136 0.936265 -1.66872 -4.53625 -0.39357 -3.33967 4.872865 HDFC Growth Fund 10.98971 2.54769 0.921779 -1.53641 -4.24646 0.013767 -2.9264 16.48711 HDFC Long Term Adv 10.98971 2.353486 0.904883 -2.02088 -5.25605 -0.90004 -3.84352 -7.63043 HDFC Tax saver 11.13139 2.292262 0.944765 -1.94188 -4.71154 -0.70163 -3.63399 -0.89438 HDFC Top 200 12.1616 1.962124 0.868932 -1.8693 -4.22105 -0.12301 -2.87834 24.0141 Standard Deviation of the Market: High standard deviation of a fund implies high volatility and a low standard deviation implies low volatility. HDFC equity fund, HDFC capital Builder and HDFC Tax saver take S&P CNX 500 as their benchmark, HDFC Growth fund and HDFC long term have taken Sensex as bench mark and HDFC Top 200 has taken BSE 200 as its bench mark. We found out that BSE 200's S.D. is 12.1616, which is greater than Sensex and S&P CNX 500 having 10.98971 and 11.13139 S.D. respectively. Therefore, BSE 200 is more volatile than Sensex and S&P CNX 500. Standard deviation of the Fund: It has been found that HDFC Top 200's S.D. is lesser than all other funds. Although benchmark index (BSE 200) is more volatile as it has higher S.D. than other indexes still HDFC Top 200 is less volatile because of lesser fund S.D. This is might be because of diversification of unsystematic risk as it compensates the systematic risk. β Value : As we know in case of funds, beta would indicate the volatility against the benchmark index. It is used as a short term decision making tool. A beta that is greater than 1 means that the fund is more volatile than the benchmark index, while a beta of less than 1 means that the fund is more volatile than the benchmark index. A fund with a beta very close to 1 means the fund's performance closely matches the index or benchmark. The analysis illustrates that HDFC Equity fund's is less volatile and its performance is very close to its benchmark as its beta value is 1.0096114 compared to other funds which have beta value lesser than 1 point. HDFC Top 200's beta value is more volatile than the benchmark as its value is 0.868932, which is very far from point 1. Sharpe ratio: A fund with a higher Sharpe ratio means that these returns have been generated taking lesser risk. In other words, the fund is less volatile and yet generating good return. The analysis shows that all the funds have negative Sharpe ratio therefore they are more risky. Comparing all the funds HDFC growth fund has lesser negative marks that means its return 16.48711 is generated taking lesser risk. Treynor ratio: While a high and positive Treynor's Index shows a superior risk-adjusted performance of a fund, a low and negative Treynor's Index is an indication of unfavourable performance (systematic risk associated with it (beta)). All the funds are having negative Treynor's ratio which means they are affected by the volatility of the market (systematic risk)or by the great recession. Jenson's alpha: Its measure involves evaluation of the returns that the fund has generated vs. the returns actually expected out of the fund given the level of its systematic risk. Higher alpha represents superior performance of the fund and vice versa. The analysis points out that all the funds are having negative alpha except HDFC Equity fund and HDFC Growth fund which have positive points. Jenson alpha ratio justifies that these two funds are at least able to achieve the expected return given the level of their systematic risk. Fema measure: The Net Selectivity (Fema) represents the stock selection skill of the fund manager, as it is the excess returns over and above the return required to compensate for the total risk taken by the fund manager. Higher value of which indicates that fund manager has earned returns well above the return commensurate with the level of risk taken by him. It has been that all the funds are having negative net selectivity because of the higher risk found both in systematic risk (B) and unsystematic risk. This findings point out, that the stock selection of the fund manager has been failed because of the systematic risk i.e. recession. Comparing to other funds HDFC Growth fund (-2.9264) has lesser negative points in this time of great crisis. This indicates that HDFC Growth fund is getting enhanced return by nullifying systematic risk and unsystematic risk. From the above analysis there is no fund which has consistency. The funds are being affected very badly either by the systematic risk or by the unsystematic risk. As we observe closely, it is the HDFC Growth fund, which has better option for the investment. Its Sharpe ratio is lesser negative than other funds which illustrates that its return is less affected by overall risk. Its alpha value is more than 0 which means its less affected by the market risk (systematic risk) and also its Fema value (selectivity) has lesser negative value which has managed to nullify systematic risk and unsystematic risk during the time of recession. An investor who is entering into the capital market for making long-term investment, the volatility of the market is important to accomplish his or her goal and these expectations are often formed on the basis of historical record of monthly returns, measured for holding period and other important ratios. We will take this fund (HDFC Growth fund) for further analysis of its portfolio. HDFC Growth Fund Portfolio Analysis Table:3.23 Portfolio 31-May-09 Name of Instrument Industry + Quantity Market/ Fair Value(Rs. In Lakhs) % toNAV Equity & Equity Related (a) Listed / awaiting listing on Stock Exchanges State Bank of India Banks 448,000 8,372.45 7.20 Zee Entertainment Enterprises Ltd. Media & Entertainment 4,160,179 7,001.58 6.02 ICICI Bank Ltd. Banks 932,397 6,901.14 5.93 Bharti Airtel Ltd. Telecom - Services 750,346 6,159.59 5.30 Crompton Greaves Ltd. Industrial Capital Goods 2,099,819 5,513.07 4.74 Bharat Petroleum Corporation Limited Petroleum Products 926,557 4,305.71 3.70 Housing Development Finance Corporation Ltd.$ Finance 182,500 3,977.77 3.42 Exide Industries Ltd. Auto Ancillaries 5,319,910 3,769.16 3.24 Divis Laboratories Ltd. Pharmaceuticals 318,535 3,666.18 3.15 Sun Pharmaceutical Industries Ltd. Pharmaceuticals 272,365 3,305.83 2.84 H T Media Ltd. Media & Entertainment 2,307,000 2,861.83 2.46 Solar Explosives Ltd. Chemicals 913,257 2,807.81 2.41 Nestle India Ltd. Consumer Non Durables 160,268 2,766.79 2.38 Dr Reddys Laboratories Ltd. Pharmaceuticals 420,000 2,719.50 2.34 ITC Ltd. Consumer Non Durables 1,462,305 2,685.52 2.31 Coromandel Fertilisers Ltd. Fertilisers 1,433,271 2,608.55 2.24 Biocon Limited Pharmaceuticals 1,319,006 2,397.95 2.06 Reliance Industries Ltd. Petroleum Products 104,250 2,368.46 2.04 Hindustan Petroleum Corporation Ltd. Petroleum Products 633,721 2,300.09 1.98 Dabur India Ltd. Consumer Non Durables 2,050,115 2,264.35 1.95 Bank of Baroda Banks 469,151 2,058.63 1.77 Infosys Technologies Ltd Software 120,000 1,926.12 1.66 MphasiS Limited Software 569,000 1,916.96 1.65 Axis Bank Ltd Banks 220,000 1,713.69 1.47 Apollo Tyres Ltd Auto Ancillaries 5,367,120 1,682.59 1.45 Tata Steel Limited Ferrous Metals 400,000 1,621.40 1.39 Hindustan Unilever Ltd. Consumer Non Durables 653,355 1,507.94 1.30 Noida Toll Bridge Company Ltd. Transportation 3,607,000 1,441.00 1.24 Thermax Ltd. Industrial Capital Goods 367,366 1,345.29 1.16 Oil & Natural Gas Corporation Ltd. Oil 111,353 1,301.99 1.12 Nagarjuna Construction Co. Ltd. Construction Project 711,738 990.03 0.85 Ballarpur Industries Ltd. Paper Products 3,967,287 987.85 0.85 Eimco Elecon (India) Ltd. Industrial Capital Goods 276,428 811.18 0.70 Amara Raja Batteries Ltd. Auto Ancillaries 836,454 705.97 0.61 C & C Constructions Ltd Construction 396,496 635.78 0.55 Maytas Infra Ltd Construction 761,912 552.01 0.47 KNR Construction limited Construction 710,597 531.53 0.46 ISMT Ltd. Ferrous Metals 1,175,668 413.25 0.36 Ahmednagar Forgings Ltd. Industrial Products 424,234 245.21 0.21 Disa India Ltd Engineering 12,612 207.85 0.18 Technocraft Industries (India) Ltd Ferrous Metals 538,745 199.07 0.17 Sub total 101,548.67 87.33 Total 101,548.67 87.33 Short Term Deposits as margin for Futures & Options 1,000.00 0.86 Cash margin / Earmarked cash for Futures & Options 5,072.00 4.36 Other Cash,Cash Equivalents and Net Current Assets 8,679.32 7.45 Net Assets 116,299.99 100.00 Table:3.24 Sectoral Allocation of Assets(%) Banks 16.37 Pharmaceuticals 10.39 Media & Entertainment 8.48 Consumer Non Durables 7.94 Petroleum Products 7.72 Industrial Capital Goods 6.60 Telecom - Services 5.30 Auto Ancillaries 5.30 Finance 3.42 Software 3.31 Chemicals 2.41 Fertilisers 2.24 Ferrous Metals 1.92 Construction 1.48 Transportation 1.24 Oil 1.12 Construction Project 0.85 Paper Products 0.85 Industrial Products 0.21 Engineering 0.18 Cash,Cash Equivalents and Net Current Assets 12.67 TOTAL 100 Figure:3.8 Table:3.25 HDFC Growth Fund (NAV as at evaluation date 30-June-09, Rs. 57.219 Per unit) Date Period NAV Per Unit (Rs.) Returns (%) ^ Benchmark Returns (%) Sensex December 30, 2008 Last Six months (182 days) 41.697 37.23 49.17 June 30, 2008 Last 1 Year (365 days) 53.472 7.01 7.67 June 30, 2006 Last 3 Years (1096 days) 36.034 16.65 10.95 June 30, 2004 Last 5 Years (1826 days) 16.439 28.31 24.74 June 30, 1999 Last 10 Years (3653 days) N.A N.A. 13.34 September 11, 2000 Since Inception (3214 days) 10 21.91 13.65 Figrure:3.9 HDFC Growth Fund - Analysis It requires a lot of research and constant watch on the capital market for a fund manager to analyze the portfolio of the particular fund. I took the secondary data from the fund review of the article corner from The Business Line web site. I comprehended the analysis and concluded my view as stated below. HDFC Growth Fund invests in stocks across market capitalisations. Despite a large-cap bias, mid and small cap stocks account for 28 per cent of the portfolio. The fund has managed to consistently beat its benchmark Sensex over one-, three- and five-year periods. In the latest portfolio, the fund has invested in as many as 52 stocks across 18 different sectors making it a fairly diversified portfolio. This may indicate net inflows into the fund. Sector Moves: There is a fair bit of stability in terms of top sector holdings in the portfolio. Banks (16.39 per cent) and pharmaceuticals (10.37 per cent) sectors continue to be the top two sector holdings, although exposures have been a bit reduced. Banks and consumer non-durables also figure among top holdings in the fund, and have seen increased exposures over the September-February period. While capital goods and banks have done well in the past year, they have been among the worst hit in the recent meltdown. The respective sector indices were beaten down by over 25 per cent in the last couple of months. Construction and predictably, software exposures have been pared in the six-month period. Interestingly, media and entertainment (8.48 per cent), which were not part of the portfolio six months ago is now in the top ten sector holdings for the fund. The power sector has been exited, while telecom services and auto ancillaries exposures have been increased substantially. Stock Moves: Most stocks are those whose prices have fallen during September-February, include stocks such as Zee Entertainment, HT Media and Dr Reddy's Labs. The fund has also taken profit booking opportunities, with several stocks whose prices rose between 60-105 per cent have been exited. These include, Axis Bank, Hanung Toys and Tata Power. Other high-profile exits include DLF, HPCL, Ranbaxy Labs, and Punj Lloyd. Reliance Industries, SBI, ONGC and BHEL are the stocks retained by the fund during the period and are among the fund's top holdings. 3.4 FINDINGS As far as analysis is concerned, we found out that the HDFC Growth Fund was among the best performers fund. Although all the funds are affected by the global meltdown, (recession) still HDFC Growth Fund has better performed comparing to other funds for its systematic and unsystematic risk. It offers advantages of diversification, market timing, and selectivity. In the comparison of sample of funds, HDFC Growth fund is found highly diversified fund and because of high diversification, it has reduced the total risk of portfolio. Further, other funds were found very poor in diversification, market timing, and selectivity. Although HDFC Top 200 Fund and Equity Fund performed better in terms of returns but these suffered by the systematic risk (market volatility) and lack of diversification. For the further clarification, we too studied the portfolio of HDFC Growth fund. One of the findings that I came across is that generally, a good model of asset classes is the one that can explain a large portion of the variance of returns on the assets and there were some stocks in the fund portfolio, which were not aligned with strategy of the fund portfolio. The optimal situation involves the selection that proceeds from sensible assumptions, is carefully and logically constructed, and is broadly consistent with the data while collecting the stocks for the portfolio. The portfolio was showing constructive outcome in long time horizon and the results can be improved by making the minor changes in fund portfolio. Hence, the portfolio theory teaches us that investment choices are made on the basis of expected risk and returns and these expectations can be satisfied by having right mix of assets. 3.5 RECOMMENDATIONS: Considering the above analysis, it can be noted that the three growth oriented mutual funds (HDFC Equity Fund, HDFC Growth Fund and HDFC Top 200 fund) have performed better than their benchmark indicators. Other funds such as HDFC Capital Builder Fund, HDFC Long term Advantage Fund did not perform well even some performed negatively. Though HDFC Equity Fund, HDFC Growth Fund and HDFC Top 200 fund have performed better than the benchmark of their systematic risk (volatility) but with respect to total risk the fund have not outperformed the Market Index. Growth oriented mutual funds are expected to offer the advantages of Diversification, Market timing and Selectivity. In the sample, HDFC Equity Fund, HDFC Growth Fund and HDFC Top 200 fund is found to be diversified fund and because of high diversification, it has reduced total risk of the portfolio. Whereas, others are low diversified and because of low diversification their total risk is found to be very high. Further, the fund managers of these under performing funds are found to be poor in terms of their ability of market timing and selectivity. The fund manager of HDFC Equity Fund, HDFC Growth Fund and HDFC Top 200 fund can improve the returns to the investors by increasing the systematic risk of the portfolio, which in turn can be done by identifying highly volatile shares. Alternatively, these can take advantage by diversification, which goes to reduce the risk if the same return is given to the investor at a reduced risk level, the compensation for risk might seem adequate. The fund manager of HDFC Capital Builder Fund, HDFC Long term Advantage Fund can earn better returns by adopting the marketing timing strategy and selecting the under priced securities. The fund manager can divide all securities into several asset classes and tries to construct an efficient portfolio based on expected returns, risk, and correlations of indexes representing these asset classes. The investment should be done in the bench mark indexes to get an "efficient" portfolio in such a way that no other combination of these indexes would result in a portfolio with a higher return for a given level of risk. It should be emphasized, however, that this is not a fully efficient portfolio because information about correlations among individual securities within an index and across the indexes is lost in the transition from individual securities to the benchmarks that represent them. These measures are more useful to investors who are putting their money into one diversified fund and are able to use leverage or invest in the risk-free asset. When the investor is investing in the different funds, the fund's marginal contribution to the portfolio's risk and return is more important than its individual security characteristics. To construct an efficient portfolio, an investor must take account of the correlations among the being considered. It is not advisable to apply just procedure or approach for all situations at least when it comes to investments though the used measures are highly reliable in the studies done on similar veins. Even at this juncture it would still be recommended that instead of going ahead only on the basis of risk and return, other indicators like new projects, sector impact, individual sentiments about companies etc besides 'common sense and intuition' may also be looked into. 3.6 CONCLUSIONS: Mutual fund has become one of the important sources for investing. It is quite likely that a more efficient portfolio can be constructed directly from funds. Thus, the two-step process of choosing an asset allocation based on the information about benchmark indexes and then choosing funds in each category may be one of the best realistically attainable approaches. To use this approach to portfolio selection effectively, investors would benefit from estimates of future asset returns, risks and correlations, as well as from fund management's disclosure of future asset exposures and appropriate benchmarks. It has been a great opportunity for me to get a first experience of Mutual Funds. My study is to get the feel of how the work is carried out in relation to fund's portfolio aspect. I got an opportunity in relation to the documentation and also the portfolio analysis that have been carrying out in facilitating the investor and the fund manager. REFERENCES Books: 1. Security Analysis and Portfolio Management (sixth Edition 1995) by Donald E. Fisher and Ronald J. Jordan. Publication: Pearson education. 2. The Indian Financial System (second edition) by Bharati V. Pathak. Published by Dorling Kindersley (India) Pvt. Ltd., licensees of Pearson Education in South Asia. 3. Security Analysis and Portfolio Management by Khan and Jain. Magazines: • Money Outlook (May &June 2009) • Business world (May & June 2009) Websites • www.hdfcfund.com • www.amfiindia.com • www.moneycontrol.com • www.sebi.gov.in • www.bseindia.com • www.nseindia.com • www.mutualfundsindia.com • www.valueresearch.com • www.indiainfoline.com • www.in.finance.yahoo.com • www.investing.businessweek.com • www.businessline.com